The tech bubble: how close is it to bursting?
There are signs that trouble may be brewing in the tech paradise. US technology stocks have been under pressure in the past week and struggling to recover. Apple, the world’s most valuable company by market capitalisation, saw $50 billion of its value wiped out in just more than a week as the stock price slid from its all-time high level at $155 to $142.
While many analysts believe that the correction in prices is overdue, the tech industry has been facing mounting challenges in the past weeks.
Uber, a ride hailing company, is still reeling from a series of scandals which led to its chief executive Travis Kalanick announcing his resignation.
Yahoo, once a mighty internet giant, is now officially part of Verizon with the completion of the $4.5bn ($3.5bn) takeover deal last week. CEO Marissa Mayer resigned in its wake, and the UK office laid off dozens of staff last Wednesday.
For years, analysts have warned that the tech bubble is bursting - yet it has persistently defied the odds and continued inflating. But, given the recent choppy water, are we any closer to breaking point?
How big is the current bubble?
Measured by market capitalisation, the top five listed tech companies – #Apple, #Alphabet, #Microsoft, #Amazon and #Facebook, are currently worth approximately $2.9tn (£2.2tn). This figure has been growing exponentially as stock prices rallied this year.
The Nasdaq Composite Index, where most tech companies are listed, is showing signs of overheating, with the price to earnings (p/e) ratio of the index increasing faster than that of the benchmark S&P 500. A higher p/e ratio provides an indication that the share price of a company may be overvalued.
The current ratio is still nowhere near the level of the dotcom bubble in the early 2000s where stock prices can reach as high as 80 times the company’s earnings.
Bubbles are also brewing among private companies
Unlike the dot-com bubble, the current tech bubble is not confined to the publicly listed companies. Unicorns, or start-ups with private valuations of more than $1 billion, are currently dominating the scene with valuations larger than many countries’ GDP.
Twitter, another social media company, has seen its share price halved since its highest level four years ago. The company is perpetually struggling to generate revenue and grow its user base in the face of competition from other social media platforms.
Many of the unicorns have yet to be profitable. Uber, despite its skyrocketing valuation, is still loss-making after eight years of operation, according to its latest audited financials. However, the company said that it was on track to become profitable and is preparing to go public in the next few years.
Spotify, a music streaming company, is set to make a direct listing on NYSE in one of the most hotly anticipated IPOs this year. While the revenue of the Swedish company is growing, its losses also grew to €173m (£152m).
While there does not seem to be an impending dramatic burst, the industry’s values may slowly be eroded as investments dry up. Pressures will come on listed companies to innovate, and unicorns would have to prove that their value to investors is more than just imaginary.