In science all knowledge is cumulative, in finance all knowledge is cyclical. So here we are in the midst of what could be called the Telecom Mobile Technology (TMT) boom 2.0. The sector is partying like it's 1999. If only Stuart the Ameritrade slacker commercials were still on the air.
Goldman, until recently, hawking shares of Facebook. Groupon turned down a $6B buyout from Google. Verizon and AT&T publicly criticize each other's networks and their respective abilities to host the IPhone on a seemingly daily basis. A host of telecom equipment makers achieved triple digit returns in 2010. Dell and HP got into a bidding war over a software company, 3Par, that facilitates cloud computing. And Venture Funding was estimated to be $237B in 2010, up 32% from 2009 according to the National Venture Capital Association.
So what is different from 1999? There are a couple of important distinctions. Yahoo bought GeoCities, an early social media firm, in 1999 for $3B and an estimated 180 times revenue. We have yet to see those types of valuations this time around. Finisar, a company that makes optoelectronic switches is currently valued around $3B, less than half it's prior boom peak yet it's revenues are up nearly 10 fold in the same time period. There is a greater reliance on equity financing, so far, than in the past episode because most of the network build outs have already occurred and the banks are strapped. And, fortunately for all of us, wild prognostications of sell side analysts are not moving stocks and markets this time around.
This time there is more substance, people do make money on the internet, the demand is growing exponentially but not just from consumer curiosity. Metrics such as "clicks" and "eyeballs" or even page views are not so prevalent. Actual income is being earned and valued. And Cloud Computing and SAAS are very real phenomena that involves businesses, governments and all manner of organizations. Consumers and businesses are demanding a convergence of data on all types of devices and this demands capital. The business models are economic and tend to be more rational; we aren't seeing clones such as Pets.com and Petstore.com which were questionable ideas to begin with. However, from an equity market perspective the result will eventually be much the same: overstretched valuations ending in a significant if not severe correction. This time it is different but, eventually though likely not soon, much the same will occur. It is always this way; after all, human nature is the one constant regardless of whether it interacts in reality or on Facebook or the IPAD.