Why the Instagram Purchase Confirms We’re In The Next Internet Bubble

This week Facebook friended Instagram with a $ 1Billion acquisition even though Instagram very recently received a round of financing that valued the company at $500 Million. The company has 13 employees, almost no revenue, and no profits.

The Wall Street Journal had a great quote “…incite cries of a Web bubble and elicit incredulous gasps from people wondering why a 15-month-old photo-sharing app is worth so much money.”

The S&P500 stock market is worth about 800 not the 1400 that it has been trading at, so it needs to go down by roughly 43%. It went down 52% during the crash of 2008. The fundamentals of the economy have not improved since the 2007 bubble, except that some real estate has come down to only 15% above fair value and some consumers have slightly reduced their debt. So the odds are that the market is ripe for another crash. The catalyst will be when people wake up and realize that the emperor has no clothes and they suddenly try to rush for the fire escape exit by selling their tech stocks. Then other investors may seek to examine their stocks in a more risk-aware light and they will sell their overpriced non-tech stocks.

Investors should stick to looking at a company's fundamentals like the ten year average earnings instead of chasing after an easy to replicate, profitless company that promotes a fad that may fade away in a few years.

About the author

Don Martin, CFP®


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