Why You Should Tune-Out the Talk of a Tech Bubble

If you ask us, David Einhorn’s talk of a tech bubble is a heap of horse dung. If you want to see what a real tech bubble looks like, think back to theGlobe.com’s IPO in November 1998.

On the day it went public, the target price for a share was $9… the first trade was for $87… the price soon went to $97 from there… and it closed at $63.50.

It was a single-day increase of 606%. The site’s founders, Stephan Paternot and Todd Krizelman, were worth nearly $100 million each afterward.

More tellingly, Paternot did an interview with CNN a year later. He got the nickname “the CEO in the plastic pants” from that segment.

Back in the late 1990s… Those companies were barely ideas… let alone businesses.

That’s because they showed him dancing on top of tables in a New York nightclub with his significant other.

“Got the girl. Got the money,” he said.

“Now I’m ready to live a disgusting, frivolous life.”

Later that year… the tides turned… and shares of the globe went from $97 to just 10 cents as its market cap shriveled to next to nothing.

There’s a social mood that supports a stock market bubble, and we don’t have it.

In addition, go back to every time the stock market starts to feature companies with new technology and new business models to go with it. You’ll find that people are skeptical.

But comments made about Facebook, Twitter and others — the ones Einhorn calls “cool kid” companies — could have been said of Google in 2004.

When Google went public, it did not have its current business model in place. Yet buying Google at the IPO was a great investment. I know because I bought some (I don’t own it anymore).

They’re a cash machine now.

Like Einhorn now, I was too skeptical back then. I thought it was a bubble. Instead, it was the beginning of the end of the newspaper business. People are always skeptical of what’s new. It doesn’t help that the stock market sometimes seems a bit crazy to give companies these valuations. But often, in hindsight, the stock market’s judgment is not so crazy.

At the end of the day, Facebook does what television used to do. That is, it keeps you glued to a screen while you’re fed advertising. Twitter’s no different. These are marketing companies that get content created for them for free by their users. Hence their huge profit margins.

Back in the late 1990s, none of the tech bubble companies had revenue. Nothing. Those companies were barely ideas… let alone businesses. But Twitter and Facebook have revenue — $665 million and $7.87 billion last year, respectively.

All the market capitalization that used to be in The New York Times, The Washington Post and Knight Ridder neatly went to Google. That’s because it revolutionized the classifieds business and took it online. Now Facebook and Twitter are cutting in on the action.

The younger generation spends more time on these sites than on the New York Times website. Advertisers are going to pay them for that. If it came down to owning shares of The New York Times or Facebook, I would rather own Facebook.


Paul Mampilly
for The Daily Reckoning

Ed. Note: Paul has been a part of a hedge fund team that managed $10 billion. And there’s one sector he specializes in that he says is rife with investment opportunities: biotechnology. In today’s issue of Tomorrow in Review he gave readers his No. 1 rule for investing in the biotech sector… and how it could help them in building their investment fortunes. Sign up for the FREE Tomorrow in Review email edition, right here, to start getting these kinds of expert tips before anyone else.

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