Bubble or not bubble?

This week, the stock market values of Amazon and Facebook rose over $500bn for the first time, Alphabet and Apple maintain their market values over $500bn. Billions of bonuses have been handed over to these tech tycoons’ employees. Some investors start to worry if the dotcom bubble will come again soon, especially when they see the tech companies are this profligate and their share prices are sky rocketing. Therefore, I want to discuss how bubbles would burst and if it is likely for the current dotcom bubble to burst in the near future.

I believe there are several phenomena which can predict the coming of bubble burst. Firstly, when too many new companies are established, it could indicate whether there is a fast expansion in the sector or there would be a bubble burst in this sector. If it is only a newly established sector, it is normal for many new companies to enter this sector when they see the opportunities in this sector; however, if it is not a new sector, the market is already compacted with too many companies, the investors have to choose the most competitive ones and get rid of the uncompetitive ones from the market, and this leads to bubble burst. The companies which can survive the bubble burst crisis in their sectors are the most competitive ones in their sectors. Once they are able to survive one crisis, they are very likely to survive even more crisis.

Secondly, when the sector is only growing in width instead of depth, bubble in the sector is more likely to burst. The meaning of my phrase, “growing in width”, is growing to cover more of the world population. When companies in one filed are only competing to gain more customers, there must be winners and losers, when the competition finishes, the losers will lose everything and leave the market. When there are more losers than winners in the sector, it can lead to a general crisis in the sector, which could cause a similar market move as the bubble burst.

Thirdly, when there suddenly appears a strong competitor, the bubble can burst immediately and the sector will lose everything to its new and strong competitor in a very short time period. One commonly know example is the story of DVD, CD, videotapes that they replaced their previous version in an incredibly fast speed. There is another historical example, which is the Anglo-Germany Naval arm race. The battleship, dreadnoughts, was the symbol of this race; once the first dreadnought was built by the British and believed to dominate any other battleships at the time, almost all countries had to abandon their previous battleship building plans and to build dreadnoughts instead in order to compete with each other. Investors and customers are like the countries at the time, and the battleships are the opportunities, once they find the existence of dreadnoughts, they will rush to the new field and abandon their previous favours.

To conclude, I think that there could be some short term volatility in these tech tycoons’ share prices; however, in the long term, as long as they can grow in depth and do not face challenges from completely new fields which are irrelevant from the concepts of AI or the Internet, their market values will continue to increase in real terms.