Tech firms continue to grow despite global threats. Photo / Getty Images
Tech firms continue to grow despite global threats. Photo / Getty Images
For a moment that perfectly encapsulates the tech mania that is gripping the markets, search for the TV interview of Airbnb's boss Brian Chesky on the day of the company's IPO last week.
In the widely-circulated clip, Chesky is told mid-interview that early trading indicates his company will go publicvalued at around US$145 a share, more than double the IPO price set the day before. Valuing Chesky's stake at US$11bn, it was the Wall Street equivalent of reading out the lottery numbers to the jackpot winner on live TV.
Chesky, his eyebrows seemingly fixed to the ceiling in shock, stumbled over his words, before eventually composing himself.
Dismissing tech company valuations as a sign of a new bubble has been a fashionable sport for the better part of a decade now, and no less popular for its advocates repeatedly being wrong. But recent weeks have felt especially inflated.
DoorDash, a food delivery app with several deep-pocketed competitors, $1.9bn in revenue in the first nine months of 2020 and $149m in losses, rose 85pc on its first day of trading to hit a valuation of over $70bn. Airbnb, which had revenues of $2.5bn and losses of $697m in the same period, was up 112pc. The latter's numbers are admittedly down due to the pandemic, but even so, conventional wisdom is out the window here.
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A third tech company went public last week and earned less attention than DoorDash or Airbnb. But, for bubble watchers, was even more astounding. C3.ai, a software company that lets businesses create artificial intelligence applications, and boasts a handful of big industrial clients, rose by almost 200pc in its first three days. It is valued at around $12bn, around 75 times last year's revenue.
For those looking for evidence to support claims of a bubble, there is no shortage of it. The Shiller PE ratio, a cyclically-adjusted measure of share prices against their earnings, is above the level before the 1929 crash, only now exceeded by the dotcom bubble. Tesla shares are up 600pc this year.
The flow of cash into the stock market is a result of exceptional monetary stimulus, meaning it has become divorced from the "real" economy that is still being pummelled by Covid.
There are parallels with the 1999 Dotcom boom. Image / Telegraph
There is, however, a counter-argument, one that looks to the future rather than the present. It posits that for all the changes that tech has brought, and the giant companies that it has created, this is still the early days of the internet revolution.
Take online shopping. Amazon has become the world's most valuable retailer, worth more than $1.5 trillion, but its revenues last year were a little more than half those of Walmart's. In the UK, people spend more than three times as much at Tesco. Last year, around 20pc of retail sales were online in Britain - and that is well above average.
Users spent $38bn through Airbnb last year, but the company estimates the market it serves at $2.8 trillion, a figure that includes the potential for its small experiences division as well as more established short-term stays. A vast untapped pool of potential customers who still use hotels and travel agents, is apparently there for the taking.
The question for tech companies has always been how much of their supposed opportunity is realistically up for grabs. The pandemic has answered some of those questions. The rapid acceleration in the digital economy, and our relatively enthusiastic adoption of it, has shown that a lot of what we simply assumed to be offline will not necessarily be so in the future.
Money is being poured into tech companies. Image / Telegraph
The explosions in online shopping, food delivery and videoconferencing, and the expected lasting changes after that, have expanded many investors' horizons, not because they expect the pandemic to last, but because they demonstrate how rapidly digital services can replace traditional ones.
This is obviously a perilous basis on which to value companies, one that largely ignores traditional metrics - profits in particular - and replaces them with some hazy vision that might be a decade or more away.
The problem with this approach is that it could just as easily have been applied during the dotcom bubble. It was as true then as it is now that the internet was going to take over the world, but it did not make Webvan and Pets.com any less doomed.
Tech investors say the difference this time round is that they are picking established winners: Airbnb looks set to dominate the parts of the travel market at the expense of hotels, and Covid has sped up that trend; DoorDash is doing the same for takeaways. They are expected to become the Facebook or Amazon of their respective industries.
If one assumes that companies like Airbnb can grow into that future, their inflated valuations suddenly start to look a little more reasonable.
But it presents other problems. A growing anti-monopoly sentiment - most recently demonstrated by last week's US lawsuit seeking to break up Facebook - may mean it is harder to build tech giants than it was a few years ago. Perhaps it is that, rather than an imminent bubble pop, about which investors should be most worried.
