Slashdot Mirror
Dot-Com Bubble v2.0?
eldavojohn wonders: "With the recent acquisition of YouTube by Google, there has been a lot of speculation (on both Slashdot & The Toronto Star) that we are nearing the second economic bubble created largely in part by growth in the digital sector. While one may be able to debate that the revenue from advertising and sales can indeed back this growth, are we headed towards the second bubble and, if so, how hard is it going to pop? Keep in mind that popular voodoo economic theory has attributed the first bubble phenomenon to 'a combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital.' I think we're experiencing all those, although it is not as flagrant as it was during the first bubble. What do you think?"
Google is one of the most speculated companies out there -- enough so that, on paper, it's worth 127.62 gigadollars, which is more than 2/3 the value of Wal-Mart and 1/3 the value of Exxon. Even though it does make money, its price/earnings ratio is an astronomical 61, whereas Wal-Mart is around 14 and Exxon is 10, which is a definite sign of tulip fever not unlike what we saw in the late 90s.
But even for the future, as a long-term investment, it's the nature of the business which matters. Most of what google sells is merely advertising -- however, a brick-and-mortar advertising company with total saturation, such as Lamar, has a high P/E ratio as well, but only has $5.6 gigadollars in market cap. Even the ubiquitous Clear Channel only has a $7 gigadollar market cap, and that's with a high P/E ratio, as well.
When google is inevitably reduced to what it's worth (probably a single percentage point of what it is currently) by whatever means -- legal action, bad earnings reports, a downturn in the PC industry, accounting scandals, a recession, its spending away billions of dollars with no results, and what not -- other people will realize that google and every other modern web company is exactly the same way.
Then whammo, Webcrash 2.0.
I feel sorry for anyone who let history repeat itself and may have actually believed these companies would rival major brick-and-mortars in revenue and profitability. The only right thing to do in such situations is to short the stocks.