Is this the stockapoclyse, as tech shares crater into the ground and no more money gets invested into the sector? Or is that 20 per cent fall in the largest internet-based companies – Netflix, Flicker and Twitter – that $275bn drop in collective value over the last month, just an overdue correction to recent price run ups?
Well, this is the stock market so the correct answer is: who knows? Google, Microsoft Oracle have also seen their stocks drop recently, while Cisco is up.
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That is, sadly, what the efficient markets hypothesis says: that all available information is efficiently integrated into prices in a market. And so given that we're looking at prices that already contain all information, we've got to wait until there's new information to see what the next change is going to be.
We can spin the story a number of different ways as the various stock market pages are. On the one side is the momentum story. Some people do buy stocks just because they appear to be going up. When enough people do that, it becomes self-fulfilling and the fact the stock is going up is what makes it continue to go up.
This is just great until whatever random event makes it drop down a tick or two and that same momentum works in the other direction. That's one explanation being proffered for what is happening now. This has some truth to it.
Another story doing the rounds is that it's really all about Crimea. Economic risk in general has increased after the actions of Mad Vlad, and thus investors would like to move out of stocks where valuations are based upon possible future growth and into those that have a steady earnings record and might, wonder of wonders, actually pay dividends. This has some truth to it: there's been a move out of the frothier end of the tech market and into those older and seemingly more secure companies in other sectors.
But what everyone really wants to know, of course, is whether this is like the end of the dot-com boom. Are we about to return to a world in which no one can ever get any finance for new projects as the stock market valuations of those that succeed mean that there's no point in the venture capitalists flashing those cheque books? The answer here is almost certainly “no” – for two reasons.
First, this isn't like the first dot-com boom. We're not all wandering around saying that: “Sure, this internet thing is great, but how in buggery do we make money out of it?”
Just consider that the companies founded the last time around are today making money. Sure, Facebitch* at a price-earnings ratio of 100 times is looking damned expansive (and it's fallen from that lofty height, too) but we can look at Google and see that a purely advertising-fed business can make very good money if it can get people to look at the stuff in between the ads.
Whether that's search or social networking doesn't change the fact that the basic business model is sound. Facebitch might be over-priced but it's not worth nothing.
The second factor is that price movements, at least so far, aren't large enough for us to be thinking that the boom times have gone. Sure, maybe Chinese online commerce site Alibaba isn't going to be worth the $200bn that's been mooted, but it's still a juggernaut of a business – making real money in real time and large amounts of it. That IPO might come out between $100bn and $150bn, which is still a shitload when you sit down and think about it.
There is a slight macroeconomic worry hidden in all of this – something that's called the wealth effect. This is what really upset the economic policy makers back at the end of that first dot-com boom. Simply put: when wealth is going up, we all feel richer, fairly obviously. As a result we increase our spending and this goes into reverse when wealth declines. If that wealth decline is large enough it can drive an economy right into recession: it was feared the last dot-com crash could have caused exactly that.
Why does it have to be this way?
Perhaps our final question is, well, if this stock market stuff leaves us open to overvaluations, booms and busts, why the hell do we put up with this method of financing? Can't we design something better?
Out in the unfashionable end of finance economics there's a potential answer to this one. Which is that major new technologies actually require a financing bubble to get off the ground. Holland wouldn't still have the tulip market if they'd not had the mania. The canals and then the railways were funded by manias; the dot-com boom gave us Google, yes, but it also gave us internet backbone Global Crossing, and Pets.com.
Sure, investors running around with open wallets does lead to malinvestment, but not looking too closely at the economic fundamentals is what allows new technology to get over the hurdle and work out what the hell will actually work with it. In this reading we need the manias and the bubbles and therefore we've also got to suffer the crashes that come after them.
Not that what's going on at present seems like a crash, just a reasonable enough rebalancing whether you prefer the momentum or the political risk story. If Facebook falls to something like Apple's valuation (once you strip out the cash Apple is valued at six or seven times earnings) then I'll agree we're in a market rout – another one of those crashes. ®
* Confused? Maybe you've forgotten Mark Zuckerberg's infamous "I'm CEO ... bitch" biz card.