The tech bubble is real — but it’s not where you think

There are plenty of reasons to worry about the new lust for tech stocks. King, the UK-based maker of Candy Crush, will be valued at up to $7.6bn when it lists in New York next month, despite being perceived as a one-hit wonder with few apparent plans for the future. Twitter is valued at $30bn after listing in November, 23 times its estimated earnings for 2014 despite failing to post a profit in its first seven years of existence. But the really worrying signs of a tech bubble lurk in the less exciting stocks.

Internet takeaway directory Just Eat hopes to command a valuation up to 50 times its earnings for last year when it completes its IPO next month. Like online white goods retailer Appliances Online, which listed earlier this month, it is a company without any proprietary IP — so no reason not to be undercut by rivals — but has managed to command dizzying valuations by piggybacking on investors’ fascination with technology stocks.

Both firms are just brands. Just Eat is a directory for takeaways, stuck on a website; AO is a smaller and less profitable version of the online business of already listed Dixons, and makes a large part of its money from selling insurance plans to its customers.

There are plenty of reasons to believe in the tech story, despite the continuous warnings about a bubble. Twitter and Facebook are trading at extraordinary valuations, but boast networks of unprecedented size and reach. Amazon, Netflix and Expedia are similarly well hyped, but own genuinely pioneering and disruptive technology.

Contrast those slick behemoths with AO and Just Eat: washing machines and curries versus the future of entertainment and shopping. What both firms offer over those other tech stocks is direct exposure to the British consumer — but then investors should be looking at lower multiples like those of Dixons or McDonald’s.

It is so tempting to point at the giants of publicly listed tech stocks and yell about a bubble precisely because they’re so deeply integrated into our lives. The threat of a shock to the valuation of Twitter or Google is big news because it could bring down global systems that we have come to rely on for communication and transactions. It’s less exciting to shout about companies like AO and Just Eat for the same reason that their valuations are a true sign of a bubble: they mean less to us, and we don’t care as much about them.

Read more at GlobalCapital.

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