App boom: Why 2019 could be the year of another technology bubble crash

It is only a matter of time before the app bubble bursts. Falling shares of the big tech companies is indicative of markets losing faith in even the established tech corps to achieve their forecasts.

When the dot-com bubble burst in 2000 it sent significant numbers of businesses to the wall. Investment banks had been encouraging enormous investment in dot-com ventures by launching Initial Public Offers (IPOs) allowing investors and entrepreneurs to cash in on vast fortunes by selling off shares in their companies.

Most of the dot-coms which listed on stock exchanges had done little more than consume vast amounts of investor cash and showed little prospect of achieving a profit. Traditional metrics of performance were overlooked and big spending was seen as a sign of rapid progress.

The cash burn was to build branding and create network effects – where something gains more value the more people use it. These are the main driver of platform businesses. With Amazon, for example, the more suppliers the greater benefit to potential customers and vice versa. Together, this would build the foundation for future profits on the assumption that the underlying business case was sound. Most were not – and yet almost any idea attracted large amounts of funding.

Fast forward 19 years and, following a similar “app” boom, investment banks are bringing forward IPOs as they foresee volatile market conditions arriving later in the year. Ride-hailing apps Uber and Lyft, respectively valued by investment banks at US$120 billion and US$15 billion, are to be placed in early 2019 to beat the collapse. Both are loss makers – with Uber’s losses approaching US$4 billion in 2018 after a US$4.5 billion loss in 2017. Traditional metrics have been ignored and user growth taken as a proxy for future profitability. But this requires an enormous leap of faith.

The NASDAQ Composite index from 1994 to 2005, showing the peak in early 2000 that coincides with the dot-com bust. Lalala666 via Wikimedia Commons

Uber, like many, has been able to tap readily available funds and has raised more than US$22 billion from investors so far. The problem with being able to raise funds so readily is that it discourages focus and efficiency. Uber is not only developing the ride hailing model but also bike sharing, takeaway food delivery and autonomous vehicles. The latter is also being developed by most of the major car manufacturers, as well as Google.

Snap Inc, owner of social media app Snapchat, is also on the rocks, as it is rapidly running out of funds – despite its US$24 billion listing in 2017. The shareholders are powerless to intervene, as only founder shares have voting rights. LinkedIn is still losing money after its US$26 billion purchase by Microsoft.

Twitter has just made a small profit for the first time, following adoption as US president Donald Trump’s main channel for US policy announcements.

Business Standard