Despite Big Valuations, There is No Tech Bubble

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Last updated on July 22, 2019 Comments: 10

I’ve always been a fan of Marc Andreessen. By the time the World Wide Web came into its own, I had already been a long-time user of and creator on the Internet. Marc’s Mosaic changed the way in which the Internet was viewed. It was fascinating, and I had to be a part of it. I was no software engineer, though; I was a music education student in college. I used the new tools to create web sites for the things I was involved with, like my school’s music department. Mosaic eventually became Netscape, and the Internet and its software became commercialized. Companies could now exist whose sole purpose was within the online realm.

Wall Street loved it, and it wasn’t too long before investors loved it so much there was no concern for real value. The market crashed, led by the tech sector.

Recently, the biggest companies in social media, a small realm within technology, have either had an initial public offering or are planning one. LinkedIn, Twitter, Facebook, and Zynga are hot right now, but some investors are concerned that most of the billions of dollars of value within these companies is based more on hype. Marc Andreessen is now a venture capitalist, and he believes that this is a great time to invest.

This is from a recent interview with the New York Times:

I’m certainly not an investment adviser, but on a 30-year basis, these things are cheap. If you compare how big industrial companies like G.E. are valued compared with big tech companies like Microsoft, Cisco, Google and Apple, tech stocks have never been valued more poorly in comparison. So not only is there no bubble — these prices are reflective of the fact that the market still hates tech. This bubble talk is about everybody being unbelievably psychologically scarred from 10 years ago.

As of writing this, LinkedIn has a market cap of of $9.41 billion. Facebook shares are going for $35 apiece on SharesPost, valuing the company at $82 billion. Twitter is valued above $8 billion, and Zynga is valued above $14 billion. If there is no bubble, there must be buying opportunities. Marc Andreessen’s venture capital firm, Andreessen Horowitz, is invested in Twitter and Facebook, but likely at a much better price than investors can receive today.

Is it fair to compare the valuation of Internet-based companies with the valuation of big industrial companies? Marc says tech companies are cheap compared to General Electric, so here’s a quick rundown of P/E ratios, all at the time of writing.

  • GE: 15.84
  • Google: 20.66
  • Microsoft: 10.70
  • Cisco: 12.29
  • Apple: 17.14

Microsoft and Cisco have a cheaper valuation than GE, but Google and Apple appear to be more expensive, at least when compared to these companies’ earnings. Are Microsoft and Cisco opportunities just because they are valued lower than General Electric?

New York Times

Article comments

Anonymous says:

This VC is totally off, it makes no sense to compare GE with Google or Apple. Google is not making engines or cat scanners. If it is bubble or not i cant say, but i think that they are overvalued especially social media and cloud companies. There valuations are ridiculous.

Anonymous says:

I think comparing the tech titans with industrial titans is rather silly. Completely different industries with different economics and different risks. Additionally, the large industrial companies tend to be far more diversified. GE is in practically every business you could think of.

Anonymous says:

i was thinking the same thing kyle. this is almost too much of an apples to oranges comparison for the reasoning to be valid.

Anonymous says:

I know people who work at both Microsoft and Cisco. Not enough to have “insider information” or anything, but enough to say that I don’t think either is undervalued. It’s hard to overvalue Facebook! Eventually it will saturate the market, I guess…

Anonymous says:

I sincerely hope your friend(s) working at Cisco are secure in their employment. Just today, Cisco announced pending layoffs of approximately 14% of the company’s workforce.

Anonymous says:

I do think some companies are certainly over valued. Linkedin shouldn’t be worth $8 billion as far as I can see. Their PE is 1150 right now. I can’t see how that is a not overvalued. Honestly I don’t think their service is of a high value but that just my opinion.

Facebook I can see being worth $85B even though it does have a high PE. Their growth rate and revenue is actually very strong.

But to say that tech as an industry in general is overvalued is not true. Most of the tech industry is in the big names which are relatively cheap nowadays.

Anonymous says:

I read that same article, and I think it’s interesting that he spoke mostly of big-tech, when it’s pretty obvious the “tech bubble” people speak of is the new guys, twitter, zynga, foursquare, etc. Yes, I think big tech is cheap right now, especially microsoft, cisco, and intel.

Even if it is a bubble, I don’t think these handful of companies will bring down the market. In 1999, valuations were sky high for everyone, including giants like Walmart – now it’s just a few select names.

Anonymous says:

I thought the exact same thing…how could anyone really put Microsoft in the same category as Zynga? yet

Anonymous says:

that is so out of whack, i can not understand the thinking there

Anonymous says:

If Big name tech stocks are over-valued then so is non-tech. I don’t think there is much belief that big-name tech is in any kind of bubble. Apple may or may not be over-valued but being over-valued is not the same as a bubble.

To me that is not the interesting question. The real question is whether LinkedIn and Facebook and Zynga, and Twitter and all these companies that have rather weak revenue models based almost exclusively on advertising can justify their valuations. Perhaps they can, but that is the un-answered question that begs the bubble question.