Are we in another tech bubble? And should we care?


Are we looking at another tech bubble? (Kieran Doherty/Reuters)

For anyone trying to make the case that we're in another tech bubble, there have been a few choice data points to highlight recently.

Last week, the Securities and Exchange Commission halted trading of Cynk Technologies, a company whose only "product" is a non-existent social network called "InfoBiz."  Despite that objectively shaky foundation, the stock suddenly surged 25,000 percent last week and reached a value of over $5 billion before the SEC stepped in to investigate.  No one is quite sure what prompted the spike, although it was preceded by several upbeat evaluations from penny-stock Twitter accounts.

And on Tuesday, a new voice weighed in the bubble question -- sort of.

In the report that accompanied Federal Reserve Chair Janet Yellen's appearances on Capitol Hill, the Federal Reserve seemed to raise concerns that some smaller tech and biotech companies are hitting unjustified valuations.

"Valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year," the report said.

It's a little unclear exactly what the Fed is trying to say here. As the Wall Street Journal noted, a later portion of the report seems to indicate that the agency is concerned about all social media and biotechnology firms, regardless of size.

The Federal Reserve did not respond to a request for clarification, but at any rate does seem to be raising some concerns about the valuation of tech companies.

Having lived through one tech bubble already, Michael Mandel, chief economist at the Progressive Policy Institute, said that he's still not too worried about whatever the Fed is trying to say.

"I think [the report] is just voicing a little note of caution," he said, rather than raising major alarm about a dangerous situation.

And, he said, there are a lot of differences between the bubble-era tech landscape and the industry we see today. While splashy and ultimately empty start-ups like Pets.com are the firms we remember most from the bubble, Mandel noted that much of the danger from the tech bubble came from the rapidly expanding debt of telecom companies looking to expand their networks.

Some tech valuations are undoubtedly high, he said, and there will be market fluctuations. But Mandel doesn't think those ups and downs will be economically significant.

Plus, Mandel argues that tech bubbles, on the whole, can be a plus for the economy. "The tech bubble of the late '90s and early 2000s left behind a lot of great stuff -- fiber, a lot of investment in new technology. The housing boom and bust didn't leave anything behind that was economically significant," he said. "If this is a tech bubble, I'm all for it."

Still, regular investors should be wary of jumping into tech stocks, said James Gellert, chief executive of Rapid Ratings, whose firm has a "bubble index" that it uses to judge new initial public offerings.

"Companies are able to go through the IPO process at earlier stages and with less proven track records," he said. Twitter, Gellert said, is the classic example: a firm that debuted with a lot of hype and a lot of promise, but has run into management problems and failed to reach its full potential.

"When track record means something again, it will be a good day for the IPO market," said Gellert, who added that he thinks people's perceptions of the tech industry as a sure thing will eventually change. But, he said, there is the potential for a big drop. "One shock to the system could see a disproportionate sellout in the tech sector,"  he said.

Hayley Tsukayama covers consumer technology for The Washington Post.
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