This question seems to be asked after every IPO of a major software or social media company, and Twitter's entrance into the market has heightened speculation once again. The debacle of the late 1990s tech boom is still on the minds of some investors who are wary of taking a risk a second time. It's important to remember, however, that the tech industry has changed significantly over the past 15 years and traders are doing a better job valuing tech companies than they did in the past.
Over-valuation was a major culprit of the tech bubble bust. For every Amazon or eBay there were 50 Pets.coms with flimsy concepts that received undeserved backing. According to Wedbush Securities analyst Michael Pachter, traders are looking not only at the profitability of a tech company, but its value to the public.
"There are a lot of new[er] companies like LinkedIn, Facebook and Twitter that are growing revenues quite rapidly, and it's hard for most investors to figure out how profitable they can be, so we see techniques used to value them such as revenue multiples," Pachter told CNET. "They appear expensive when compared to more traditional businesses, but the market clearly believes that many of these companies have a lot of growth ahead of them."
This caution on the part of some investors, however, doesn't mean that a bubble isn't forming. Companies like Pinterest, WhatsApp and Snapchat have recently attracted venture capitalists and valuations in the billions. These websites and applicatoins generate little to no revenue and are unlikely to turn a profit in the near future. An IPO for one of these firms would be a quick money-maker for their backers, but very few other people.
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Categories: Stock News