Relax, There’s No Tech Crash Coming (Yet)

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The Apple 2 campus in Cupertino, California. Noah Berger/Reuters

If the most enduring cliché about Silicon Valley is that of the 20-something impresario who claims his Uber-for-dry-cleaning app is making the world a better place, then a close second is that of the whole industry as a giant bubble about to burst. That bubble, in the popular imagination, is inflated by investors on Wall Street and Sand Hill Road who shovel millions into those very Uber-for-X startups, hoping to turn the latest Stanford-fueled fever dream into a herd of decacorns.

Part of the bubble mentality also stems from the fact that tech economy is based in California, which has been home to boom-and-bust cycles ever since James Marshall found gold in 1848. And a tech bubble did famously burst in 2000, wiping out the investments of ordinary Americans who thought Pets.com and eToys.com were fated to be pillars of the new digital economy. In a somber editorial from Christmas Eve 2000, The New York Times opined that the internet “may not be an indiscriminate, magical new means of making money.”

Seventeen years later, Silicon Valley is more central than ever to the world economy. Astonishing valuations reflect the importance of the corporations that cluster in San Francisco and its southern suburbs: Uber ($68 billion, though the company hasn’t gone public), Apple ($771 billion), Google parent company Alphabet ($664 billion) and Facebook ($448 billion). Last month, Tesla became the most valuable car company in the world, valued at more than $50 billion, despite producing far fewer vehicles than competitors like General Motors and Ford. Meanwhile, in Seattle, Amazon continues its dominance of retail, a position reflected in its $458 billion valuation.

Yet the old, nagging fear remains: Are we in a bubble once again?

Not so, according to new research by the Leuthold Group, a market research company based in Minneapolis. In a recent analysis, which was first covered by Lu Wang of Bloomberg, the Leuthold Group found that, in relative terms, the stock market today is where it was in 1997—i.e., nearly three years away from the kind of rabid valuations that caused Pets.com to become a byword for the brutality of a market correction.

In a phone conversation, Leuthold Chief Investment Officer Doug Ramsey tells me he used six “valuation thresholds” on the S&P Index to reach the conclusion that 1997 is the closest analog, in recent tech history, to 2017. He’d been hearing from people who thought the current climate was approaching the insane, catastrophic peak of 1999. His analysis suggests such concerns are unfounded. “If we’re headed towards that, we’re in the really early stages,” Ramsay says.  “Today’s valuations are just very pedestrian.”

At the same time, Wang of Bloomberg cautioned that “Leuthold’s study is hardly an all-clear signal. Saying stocks are cheaper than they were at the top of the biggest valuation bubble in history is a long way from saying they’re cheap. Mostly, it dramatizes the excesses of that era, while reminded people that not all rallies look alike.”

Indeed, the current era has plenty of excesses of its own. The Los Angeles–based social media company Snap, creator of Snapchat, currently has a market capitalization of $27 billion. As it went public this year, Clement Thibault of Investing.com warned that the market was witnessing “likely one of the most overvalued IPOs in recent years.”

I mentioned Snap’s seemingly inflated valuation to Ramsay, and he counters by noting that “overvaluation is not pervasive. It hasn’t spread throughout the entire sector.”

At the same time, tech companies are far more reluctant to go public than they were in the past. “The most dynamic industry on the planet has been actively deciding to keep as much for itself as possible and shut out the rest of the populace by avoiding public stock offerings,” my colleague Kevin Maney wrote last summer. He noted that the Valley’s most sought-after unicorns (companies hitting the billion-dollar valuation), including Uber and AirBnB, have refused to offer stock. That effectively restricts any large-scale losses to investors in Palo Alto and Manhattan, insulating noninstitutional investors from any significant market fluctuations.

Yet others worry, if for no other reason that the world economy seems especially volatile in 2017. What will Brexit mean? What will Donald Trump do? Can the likes of Snap founder Evan Spiegel or Twitter’s Jack Dorsey be trusted as responsible custodians of enormous stockholder wealth? For that matter, is that wealth anywhere near reasonable, considering that Snapchat’s single compelling feature is the ability to create silly features?

“This Tech Bubble Is Bursting,” declares a headline in the Wall Street Journal.

Declared, rather—a year ago.