Stop sensationalizing the tech market. These sky-high valuations are based on hype, not fundamentals – Reuters

Elon Musk’s takeover of Twitter is collapsing because it rested on the same shaky foundations as so many tech valuations: Twitter shares rose sharply on initial excitement following the announcement, then fell fallen to lower levels than they were before Musk’s big reveal. These fluctuations are not based on fundamentals. Instead, they’re based on information and media related to Musk’s fame. They are also based on questionable metrics provided by Twitter itself.

We need to stop sensationalizing the technology market. The hype and headlines that surround tech startups have replaced sound economic analysis. If this continues, the tech bubble will burst. It will be just as destructive as the dot-com crash of the 1990s. Plus, it could be potentially catastrophic for retail investors. People’s hard-earned money is being invested in Big Tech, and they will lose out if the bubble bursts.

These exorbitant valuations are totally unjustifiable. Software startups receive valuations that are up to 100 times their annual revenue. Take Uber, the hugely popular travel app, for example. It has been valued at nearly $100 billion – but in about a decade of trading it has so far failed to turn a profit. How can a company that consistently loses billions of dollars justify such a high valuation?

Photo and video messaging app Snapchat has a similar valuation, hitting $100 billion in 2021. However, it has yet to post a full-year profit, and in 2020 it posted a stunning loss of just under a billion dollars.

A fundamental problem is the hype that surrounds both established tech companies and startups. The immediate excitement that ripples through the investment world as a new technology company emerges is understandable. But the media and the financial sector then cause a completely uncontrollable spiral.

There is so much publicity around the tech market that when one man privatizes a company, the stock price increases dramatically. Of course, news has always moved markets, but not to this extent.

Suppose the stock price of a multi-billion dollar global company is in the hands of one person. In that case, all it takes is a scandal knocking on Musk’s door, and Twitter could collapse. A similar course of events occurred at McDonald’s when former CEO Steve Easterbrook was found to have had “an inappropriate relationship with a subordinate”. The fast food company’s shares subsequently fell dramatically, costing the company $4 billion.

The volatility of the tech market — as highlighted by Musk’s single impact on Twitter shares — means it’s harder than ever to accurately predict what the future holds for these tech startups. Yet investors, boosted by the hype, continue to invest at a higher rate than ever.

We recently saw the Nasdaq composite hit a high it had only hit once in its entire history. This other time was just before the dot-com crash of 2000, and we can’t ignore that unsettling sense of foreboding.

Two key factors led to the dot-com crash: the use of investment analysis that ignored cash flow and wildly overvalued stock prices. Unfortunately, both of these mistakes are repeated in today’s technology market.

It’s crucial that investors see this as soon as possible – otherwise, inflation and bloated valuations will push tech companies to the edge of a financial cliff. For an industry that has been propelled so quickly to the top of the investment mountain, it will be a long way down. Also, people’s savings are at risk here. How many people have pension funds in these companies? It could ruin people’s retirement.

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