Another dot-com bubble takes shape

Tony Glover asks if yet another technology bubble is inflating, just a decade after the last one burst with disastrous effect.

About US$5 billion was invested in internet start-ups in the first four months of this year as hopes of a Facebook public offering continue. Alex Hofford / EPA

A decade after the disastrous dot-com crash, internet stocks are once again in danger of becoming a "bubble" market.

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Last Updated: May 11, 2011

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"Whether this is another dot-com bubble depends how you define bubble," says Adrian Drury, a principal analyst at the research company Ovum.

"If you define it as an irrational exuberance for stocks exposed to growth in specific markets, such as social networking, then we are not on our way to a second dot-com bubble, we are already there."

Investment in internet start-ups has so far this year reached its highest level since 2000, the height of the dot-com boom that preceded a crash that wiped billions of dollars off the value of technology stocks.

According to Thomson Reuters Deals Intelligence, about US$5 billion (Dh18.36bn) was invested in internet start-ups in the first four months of this year. Although this is below 2000, which saw investment of $55bn over the year, it is the highest level since the turn of the century, and the dot-com investment market is growing fast.

Investors are flocking to internet stocks, particularly those at the stage of making an initial public offering (IPO) of their shares on the stock market.

Some analysts see this trend as evidence that we are already witnessing the start of a bubble, an inflated market which must eventually burst, in dot-com stocks.

"We would concur that there is a huge amount of interest in internet companies, particularly at the pre-IPO stage," says Mr Drury.

He quotes the example of Renren, a Chinese internet-based social networking site that offers Facebook-style services to China's rapidly growing number of online consumers. The company had its IPO on the US Nasdaq stock exchange last Thursday.

"This was a double whammy of social media and a Chinese market growth story. Both are places where investors want to be right now. Anything in the social networking space is experiencing intense investor interest," says Mr Drury.

"The projected price of Renren shares at its IPO was in the range of $12 to $14. On the first day of trading, the shares peaked at $18.5 before settling at around $17. This is a result of the fact that investors are rushing to get into Facebook-like social networking stocks."

Investor enthusiasm for the Renren IPO should also be seen in the context of uncertainties surrounding the company's future. Aside from the difficulties of gauging precise user numbers for social networking sites, the fact Renren is based in China raises a question mark over the stock.

Some market watchers privately express fears that Chinese internet start-ups, such as Renren, are vulnerable to a government crackdown if people start to use the medium to express views the authorities consider politically suspect.

Since the political upheavals in North Africa and the Middle East, the Chinese authorities have become overly sensitive regarding the exchanging of information and opinions on the internet.

China's history of dealing with social networking sites from outside the country is not a happy one. It has previously blocked leading western websites Facebook, Twitter, Flickr and YouTube.

All China has to do is ban or simply block a website it considers undesirable, something the government has seen fit to do in the past.

But these reservations did little to dampen the desire for Renren shares at its IPO.

This is seen as evidence of a building investor interest in the long-awaited Facebook IPO. Facebook is estimated to be worth about $70bn and, if it goes public as expected, the feeding frenzy for social networking shares could send the market for internet stocks into overdrive.

Given the rapid evolution of new web-based services such as social networking and the fact the last dot-com crash was a decade ago, the current level of investor enthusiasm for internet stocks is understandable. But the big question is how big a new dot-com bubble will grow before it bursts.

Investors and analysts believe that, this time around however, the boom in internet stocks is based on more secure foundations than that of a decade ago.

Underpinning the surge in internet stocks is rapidly evolving technology enabling web-based communications to explode across the globe.

According to the research outfit International Data Corporation, more than 100 million smartphones were shipped worldwide in the last quarter of last year. This represents an increase of more than 87 per cent over the same period in 2009.

"The driver of this phenomenon is the rapid growth in the adoption of smartphones," says Mr Drury. "This is having the effect of putting powerful hand-held computers into the hands of a mushrooming sector of consumers across the world.

"This is the underlying market dynamic powering the current boom in internet stocks."