Billions of dollars flows into technology startups as social media apps suck up cash but investors are beginning to ask if they are really worth the outlay.
The price tags for initial public offerings are impressive but when the share hit the markets, many falter and start to drop away.
Facebook capitalised at $104 billion in 2012 and now stands at $252 billion, but others are flopping where the touchstone IPO succeeded.
Twitter hit the market with a peak $34 billion valuation soon after – but now stands at a more modest $17.9 billion.
Some experts see the technology bubble about to pop and cite Twitter’s slide and Snapchat’s troubles as signs of impending doom for technology IPOs.
Snapchat may do the same disappearing act as the images users send each other. The app destroys messages a short time after sending.
CEO Evan Spiegel is struggling to raise cash after turning down a £3 billion offer to buy the app from Facebook.
Value and profitability
Now, the company is valued at $19 billion and looking for $500 million to fund growth.
The money is hard to come by despite investors pumping more than $43 billion into dozens of Silicon Valley companies over the past 12 months.
At one time investors were queuing up for a bite of Twitter, Snapchat and other app giants such as DropBox and Pinterest.
However, investors are starting to realise that technology valuations do not relate to profitability.
Pinterest has put a value on the company of $11 billion, but made less than $50 million profit last year and expects revenue of $200 million this year.
The multipliers are far beyond the cash these online moguls need to generate to repay investors within a reasonable timescale.
Tech market correction
Technology gurus are following the trend of Google, Amazon and Facebook, but lack the user base to make the profits these giants reap.
For users, new apps start up every day and many are just churning old ideas in a new skin.
How will this play out. No one knows, but at some stage technology valuations must follow the rules of other business sectors.
The true value of a business is what a buyer will pay.
Hardened investors look at assets, price/earnings ratios and cash flow, among other factors.
It’s obvious the tech market needs a correction, and when it comes some big companies are in for a fall – Twitter and Apple seem to have unsustainable valuations and could be among those to fall the furthest.