Friday 15 December 2017

Five reasons why this just may not be a tech bubble

The Collison brothers, John (L) and Patrick (R), who founded online payments firm Stripe
The Collison brothers, John (L) and Patrick (R), who founded online payments firm Stripe
The Facebook and WhatsApp app icons displayed on an iPhone.
Adrian Weckler

Adrian Weckler

IS there any irony in Irish economists identifying a "tech bubble" while lauding a "property recovery"?

While a $19bn (€13bn) Whatsapp acquisition makes it tempting to reach for a "tech bubble" narrative these days, it might be no harm to keep a few things in perspective. Here are five reasons why we may not be in a tech bubble.

* Tech firms go from zero to mega-profits in a very short time

Take the most recently talked-about tech IPO, King Digital Entertainment – the firm that makes the iPhone game, Candy Crush.

It went from no income at all to €1.4bn in annual revenue and a whopping €412m in annual profit within 18 months.

How many companies in other sectors can do that? What this effectively means is that investors can spread out several €3m, €5m or €10m investments across multiple promising firms. When one of them hits gold, it pays for all the others.

Don't forget that the venture capital model of funding is primarily about a few winners and lots of losers.

* The biggest tech firms are trading at normal ratios, anyway

Conventional wisdom is that tech firms trade at ratios of 30, 50 or even 100 times their profit levels. In the biggest cases, this simply isn't true.

For example, Apple makes about €36bn in profit (from around €150bn in annual revenue) and has a €370bn market cap. That's a valuation of 10 times earnings. And that doesn't even include €110bn in cash that the company has.

If conventional metrics are your bible, Apple actually looks cheap. (Google is admittedly wider, with a €10bn profit and a €275bn market cap. But that company is growing a lot faster than Apple.) You could say the same for the aforementioned King Digital. It currently trades at €4.5bn, which is 11 times its current €412m annual profit.

* It may not have much to do with low interest rates

One oft-quoted meme is that bondholders and institutional investors are desperate to invest in something because bonds and interest rates are so low.

But PwC recently published research which showed that the software sector is recording steady, consistent gains in funding over other sectors such as health, biotech and financial services. If it were just low interest rates, wouldn't all profitable sectors see some of this extra investor money?

* Long-term potential is much higher with tech firms than other industries

Earlier this year, the two-year-old online payments firm Stripe – founded by Limerick's Collison brothers – received $80m (€58m) in new funding for a small percentage of the firm, bringing the firm's total financing to $120m (€87m) at a valuation of well over €1bn.

Evidence of a bubble? It's unlikely: under 5 per cent of the world's payments occur online. The company that creates the right payment mechanisms will have a hugely lucrative business. Stripe's investors are looking ahead.

* It's getting harder and harder to define what a tech company even is

Is Eircom a tech company? What about Ryanair? How about Tesla? Or Amazon? Or Casio?

All of these companies now derive a large chunk of their value from being heavily exposed to our adoption of technology. Yet none of them is, arguably, a tech firm. (Amazon is primarily a retailer of physical goods that happens to sell them online.)

Barring exceptions such as Facebook's curious $2bn acquisition of virtual reality headset Oculus Rift, most of the money going into tech is into software firms.

Ireland does quite well here, incidentally: Irish software firms announced around $50m in funding announcements in the first three months of 2014.

Sunday Indo Business

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