Philly Inc: 'B' is for billions and bubbles

Instagram is used on an iPhone Monday, April 9, 2012, in New York. Facebook is spending $1 billion to buy the photo-sharing company Instagram in the social network's largest acquisition ever. Instagram lets people apply filters to photos they snap with their mobile devices and share them with friends and strangers. (AP Photo/Karly Domb Sadof)
Instagram is used on an iPhone Monday, April 9, 2012, in New York. Facebook is spending $1 billion to buy the photo-sharing company Instagram in the social network's largest acquisition ever. Instagram lets people apply filters to photos they snap with their mobile devices and share them with friends and strangers. (AP Photo/Karly Domb Sadof)
Posted: April 11, 2012

For the purposes of this column, let's assume we're in the midst of another technology-stock bubble.

I say "assume" because it's awfully hard to type the phrase "irrational exuberance" on a crowded Yahoo Finance message board without getting laughed off the Internet.

But the notion did cross my mind Tuesday after the market capitalization of Apple Inc. briefly surpassed $600 billion. As it turned out, the giant sucking sound that is Europe's financial crisis exerted its downward force on U.S. stocks, affecting even the world's most valuable company. Shares of Apple closed at $628.44, down $7.79, or 1.2 percent.

Still, it was little more than a month ago that the designer of iPods, iPhones, and iPads first closed at about $500 million in market value, and not quite three months ago that its value surpassed $400 million.

Is it any wonder some analysts began predicting Apple would become the world's first trillion-dollar stock?

One stock does not a bubble make. But two other corporate moves involving billions of dollars happened Monday that stirred my inner Alan Greenspan.

First, Microsoft Corp. opened its windows to let in about 800 patents from AOL Inc. in exchange for $1.06 billion in cash. Who knew that AOL, which turned a net profit of $13.1 million on revenues of $2.2 billion in 2011, possessed anything worth a billion dollars? Not analysts, some of whom thought the intellectual property might fetch a mere $300 million.

Second, Facebook Inc. showed how much it "liked" photo-sharing service Instagram Inc. by promising $1 billion in cash and stock. Facebook is not a stock now, but it is expected to go public soon with an out-of-gate valuation that could be $100 billion.

Quite frankly, it doesn't bother me if two privately held companies want to swap a billion dollars between them, even if one (Instagram) has no revenues and 13 employees. Chief Facebookie Mark Zuckerberg is writing a great script for a sequel to The Social Network with his insta-dealmaking with Instagram founders and new millionaires Kevin Systrom and Mike Krieger.

What does give me pause is when our latest Smartest Man in the Room pays double for what some smart Silicon Valley venture capitalists said was worth $500 million only one week ago.

I get uneasy when companies appear to be overpaying for acquisitions or spending excessively on expansion. It's hard not to think back to the tech-stock bubble of the late 1990s, when a handful of stocks powered the major indexes to nosebleed heights.

In October 1999, The Inquirer's economics columnist, Andrew Cassel, wrote about investors' enthusiasm for dot-com stocks with elephantine valuations and no profits. And he noted that just seven stocks - Microsoft, Intel, Cisco, IBM, Lucent, AOL, and Dell Computer - represented 15 percent of the total worth of the Standard & Poor's 500 Index.

Today, the 10 biggest stocks by market capitalization account for 20.7 percent of the $12.5 trillion worth of the S&P 500 - Apple alone is responsible for 4.75 percent of that. Only Microsoft and IBM retained their lofty valuations (relatively speaking) from 1999's Super Seven.

Instagram is indeed popular with 30 million users, but so, too, was Flickr when it was purchased by Yahoo Inc. for $35 million in 2005. A onetime darling, Yahoo has seen revenues and profits slide over the years and announced Tuesday a new effort to reorganize operations.

Facebook isn't Yahoo, I know. Apple avoids splurging on billion-dollar M&A deals. And Microsoft may not be the utility it once was but still has a cash hoard of more than $50 billion.

The tech world may be bubbling along, and I may feel unnerved, but true bubbles are hard to call.

Just don't tell me "It's different this time." For then I'll have no doubt, and let the bursting commence.

Contact Mike Armstrong at 215-854-2980 or marmstrong@phillynews.com, or follow on Twitter @PhillyInc. Read his blog, "PhillyInc," at www.phillyinc.biz.

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