By Daniel C. Roarty, CFA, AllianceBernstein
Are technology stocks in a bubble? Opinions differ. But the sector’s startup baby boom and the rich valuations being showered on so many fledgling firms are worrying. It is important to be more discriminating when investing in disruptive innovation today.
The tech investing scene has never been more youth obsessed. Publicly traded tech companies that are less than four years old are trading at nearly nine times sales—a 40-year high—while the premium to their older counterparts has exploded (Display).
To study this youth movement more closely, we’ve gathered a collection of young tech companies worth $1 billion or more that have either been public for four years or less or are still privately held. (Firms valued in excess of $1 billion account for more than 90% of the Nasdaq’s market capitalization.) Think of this as Nasdaq’s nursery: from this brood will emerge the Apples (AAPL), Amazons (AMZN) and Googles (GOOGL) of tomorrow.
Our basket of young companies currently makes up a third of all technology firms with valuations above $1 billion, a level only surpassed during the late 1990s. But there’s one glaring difference: the number of privately held startups has skyrocketed to 67, or half of our nursery group, versus a peak of eight (or 6%) in the fourth quarter of 2000 (Display). Many investors may be unaware of the important trends developing in this less transparent part of the technology market.
A Funding Bubble, if Not a Tech Bubble
These tech babies are being raised in relative affluence, thanks to an outpouring of venture-capital (VC) funding, which had reached a run rate of $26 billion by year-end 2014. This was the largest annual influx in 14 years and exceeded 1999 levels of $22 billion (though it’s still half the dotcom-era peak of $52 billion at the end of 2000). These youngsters are taking full advantage of the friendly funding environment. Roughly 82% of our private nursery companies have raised capital in the past 12 months, up from 62% for the same period a year earlier.
