Tech Pop 2.0 Bubbling Up?

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Soon after the Nasdaq soared above the 5,000 level last Monday there was suddenly a raging bull market in predictions that the “tech bubble” appears poised to burst.

In case you missed it, here’s some of the rationale: The last time the Nasdaq hit 5,000, the so-called dot-com bubble quickly popped. By the way, that was 15 years ago this week, and since asset bubbles tend to happen in 14- to 15-year cycles, they point out, some poppage is due. Maybe overdue.

Actually, this time it will be worse, investor Mark Cuban proclaimed last week. (He knows a thing or two about timing bubbles, since he adroitly sold his tech company just as the dot-com bubble peaked the last time.)

Beyond that, the pop-is-coming crowd postulated, a quick deflation is simply the inevitable result of any long and steep run-up of valuations. Such run-ups often start and are fueled by an old problem: low, low interest rates, which force investors to chase whatever is viewed as hot, absurdly pumping up prices in that overheated commodity. The run-up ends when investors finally realize that valuations have come untethered from the Earth and have floated into the stratosphere.

And, they say, that kind of run-up is what we’ve seen in tech companies in recent times. If you’re looking for an example, consider L.A.’s Snapchat, the app that lets you send messages and images that disappear. It’s been valued at an eye-popping $10 billion for a year or so but now that value could go as high as $19 billion, based on the funding it’s seeking. Let me ask: Is a small company that’s only now starting to get revenue – and the amount of that future revenue is still unclear – really worth more than three times as much as L.A.’s biggest bank company, City National Corp.?

There are some other local companies with surprisingly big valuations, though not in Snapchat’s league. JustFab, the fashion e-tailer, may be worth $1 billion, and Tinder, the dating app, could be worth $750 million to $1 billion. TrueCar, which is publicly traded, has a market cap of almost $1.4 billion.

For comparison’s sake, the Smart & Final chain is worth $1.1 billion and KB Home is worth $1.3 billion.

This is not to suggest that any of those particular tech companies will see their values crash. It is to suggest that many tech companies have high valuations, and if there is a pop in the bubble, the companies with high valuations will be most exposed to the possibility of a plunge.

Which brings us to the point: If tech company valuations do pop, and pop big, it’ll hurt Los Angeles. That’s because the tech companies that populate Silicon Beach have become an important part of the local economy. It is the one sector that’s had the most top spin in recent years. A number of experts have opined that L.A.’s nascent tech community has offset the diminution of the traditional entertainment industry.

But wait. Some say not to worry; fears of another tech implosion are overwrought. Their reasoning is that this is not 2000. The Internet has grown up; while revenue was illusory for many dot-coms 15 years ago, today we have several ways to monetize Web traffic. Sure, they reason, tech companies – at least some of them – may be overvalued today, but it’s likely their values will adjust downward in an orderly market correction. There should be no plunge. At least nothing like the 70 percent drop in the Nasdaq in the 1½-year span beginning in March 2000.

Maybe they’re right. But of course, no one really knows if a dot-com bubble burst 2.0 is coming. All we do know is that if there is a sudden swoon in the tech sector’s fortunes, it would be no mere academic event for us.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].

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