Companies like Twitter are valued at being worth billions and from what I read the estimation of value is as important as the actual one. Put another way, the perception is as important as the reality. Snapchat, a new start up with no revenue is estimated to be worth about $3 or 4bn and Dropbox’s valuation could be as high as $8bn—were they to choose to go public, although they are not, or perhaps not yet, profitable . We look at those valuations as being so impressive, praising all those brilliant young people for achieving so much so quickly!
I wonder how many of us understand the meaning of these numbers. More importantly how much do we grasp the consequences of what they either imply or bring with them? Are those companies worth the amount they raised through interested investors? Or, are the numbers a product of what we wish, hope or think they are or will be worth? Most tech companies with high valuations have yet to show earnings. Does the idea of being rich at least on paper veil our understanding? Twitter did make a lot of millionaires when it went public. Can it be that the difference between perceived and actual reality blurs our judgment? The possibility of participating in another Facebook and quickly earning a lot of money made the opening Twitter stock almost double. While its value has risen 60% since it went public, it is losing money. Although price/earning ratios can be used as indices of whether an investment is sound, the fact that this can’t be applied to Twitter since it has no earnings hasn’t stopped investors, at least not yet.
And it’s not only tech companies. Recently Francis Bacon’s painting of Lucien Freud sold for $127mil ($142 with the commission) and that is on top Edvard Munch’s The Scream that had sold for $115mil. We tend to note the recent astronomical amounts for art pieces but accept them with nothing more than “it’s crazy”. Whether with tech companies valuation or with the price of paintings, such practices underscore that the value of money as a medium of fair exchange is changing and changing in a way that may not benefit the whole. A few commentators are suggesting it looks like another tech bubble and warning that bubbles burst. But the market, as well as most analysts, does not seem ready for that reality, saying that if and when the bubble bursts, it will not be as drastic as the one in the 1990’s since there won’t be as many losers.
To an observer like me, the bubble is here, it’s just not known how long it will be before it bursts. But the real problem is beyond the bubble, beyond how many losers, or winners, there may or may not be. It lies in what’s happening to both our perception of reality and how we use money.