Silicon Valley Tech Bubble About to Burst
Has Silicon Valley become a bubble—and is that tech bubble about to burst?
In fact, it seems that while the tech bubble is more resilient than the one fueled by dotcom companies in the early 2000s, some weaknesses are becoming more apparent. Certainly, there is an air of mystery about the record tech sector valuations.
The idea of a tech bubble is inevitable, considering that social networks, focused on such things as likes and tags on photos or tweets that confuse people or say nothing at best, are in the market’s driver’s seat. Some have certainly exploited these networks to great effect. Politicians and celebrities in general can drive up the value of their personal stock. Their main utility is influencing the masses.
The tech sector, with a few exceptions, has become a major tool for personal control and mass propaganda. Eventually, the bubble that has inflated to the point where a social network (i.e. digitized gossip) is worth more than U.S. Steel was in its heyday will burst. Even Apple Inc. (NASDAQ:AAPL), one of the companies that can boast of having developed actual tech, is suffering.
Apple stock has lost almost 6.5% of its value year-to-date (YTD). As of last year, it has lost well over 22%, while Twitter Inc (NASDAQ:TWTR) has lost over 35% YTD. These two stocks are among the ones already bursting at the seams. Meanwhile, Facebook Inc (NASDAQ:FB), one of the companies blowing the bubble, has gained 13.49% YTD. The other warning signs are less obvious to investors because they involve private companies, which never make it to the initial public offering (IPO) stage.
The so-called unicorns—startups with a perceived enormous market potential—are diminishing. Those unicorn tourists, which are the mutual funds that financed the startups, round to boost paltry returns. The unicorn chasers have rushed for the exits as many Silicon Valley companies have started laying off employees. (Source: “Match And Square IPOs To Send Unicorn Tourists To The Exits,” Forbes, November 19, 2015.)
There is reason to fear the bubble and avoid a repeat of what happened in the mid-90s, when several Internet companies grew fast and then burst. (Does anyone remember Pets.com?)
Today, the atmosphere is very similar. Even a car company like Tesla Motors Inc (NASDAQ:TSLA) pretending to be a tech company having the requisite NASDAQ address is falling victim to volatility. The company promises too much that it cannot deliver.
There is a madness and people have paid high prices before. Perhaps they were burned enough to learn to stay away. Meanwhile, Silicon Valley employees are starting to worry about layoffs. (Source: “Expect layoffs, consolidations in Silicon Valley: Sacca,” CNBC, May 10, 2016.). Investors and venture capitalists have tightened their purse strings and closed the taps; a reckoning is coming—again.
The sensation that the tech bubble is about to burst is spreading. Billionaires and would-be presidents seem to think so. American tech king Mark Cuban has been warning investors that a new bubble is about to burst in the dotcom sector. Just as at the beginning of the early 2000s, certain companies operating on the Internet have become overvalued, leading financial markets in the near crash. Mark Cuban hinted that the overvalued companies are those like Uber, Twitter, and Facebook.
Much more than Cuban, a few weeks ago, republican presidential candidate Donald Trump warned Americans that the technology industry is living on borrowed time. Silicon Valley, said Trump during an interview with Reuters, is in a “dangerous financial bubble.” Trump said out loud what many people are thinking: how is it possible for so many tech startups to sell shares at exorbitant prices without ever having earned a profit? Trump likened the situation to the pre-subprime crash in 2007. (Source: “Silicon Valley mocks Trump over his tech bubble warning,” Reuters, May 18, 2016.)
Silicon Valley mocked Trump but the statistics suggest he’s the one who can go on mocking. Tech industry people have also warned of a tech bubble. They see too many private companies valued at $1.0 billion or more—the so-called unicorns. There are now 163 of these unicorns, according to capital research firm CB Insights. (Source: Ibid.)
Some remain optimistic, though.
Marc Benioff, CEO of salesforce.com, has dared suggest that Cuban is wrong. Benioff, and those who share his views on tech, continue to see and believe in Silicon Valley’s ability to innovate and monetize developments. This, they say, is the big difference with the bubble of the early 2000s, when most tech startups were built on shaky foundations, apparently undeterred by their failure to even conceive income. (Source: “Salesforce CEO Marc Benioff says Mark Cuban is wrong: There’s no bubble,” Business Insider, June 15, 2015.)
Admittedly, you don’t have to be Mark Cuban to see that the party in Silicon Valley is about to stop. The epicenter of U.S. high-tech lives in fear of the bursting of a bubble that has not stopped swelling. The signs are there, among the giants, the ones that actually make things. Apple is selling fewer “iPhones,” Twitter is stagnant, and it’s too risky for the Ubers and Airbnbs of this world to launch IPOs.
The bubble is about to burst. There is little question about that. The trouble is knowing when the bubble will burst.
Savvy investors, or those lucky enough to get the timing right, can still get out with a handsome profit.
One factor affecting when the tech bubble will burst might be a Trump presidency. Trump has not minced his words about Silicon Valley. He has accused Amazon.com and Jeff Bezos of not paying enough taxes and the valley has responded in kind. Presumably, should he earn the big chair in the Oval Office, Trump would continue to speak of a Silicon Valley bubble, not too inadvertently, prompting it to burst.
The Wall Street Journal, nevertheless, has offered an insight: the sale of ping-pong tables. It might be as good as any indicator and better than most. Table tennis or ping-pong tables have become absolute must-haves at tech companies and any self-respecting startup. Twitter, apparently, used to buy these from Billiard Wholesalers regularly. (Source: “Is the Tech Bubble Popping? Ping Pong Offers an Answer,” The Wall Street Journal, May 3, 2016.)
Recently, in correspondence to Twitter’s stock drop, sales of ping-pong tables have also dropped. But it’s not just Twitter; Silicon Valley in general is ordering fewer tables.
Given these elements, it is legitimate to ask whether the tech bubble bursting predictions are worth noting and if Mark Cuban and Donald Trump are right—though they see the bubble differently.
Surely, something will happen in the coming months. An accurate prognosis is unlikely at this stage because of the very nature of bubbles. However, many dotcoms are clearly overvalued today.
But on the financial markets, investor confidence often outweighs the company’s actual results. This means we could never know when the bubble will burst before it does.