Are We Headed for a Tech Stock Bubble?

Dow, S&P 500 reach record high, but tech investors are not partying like bubble of 1999.

Specialist Anthony Rinaldi is reflected in one of his screens at his post on the floor of the New York Stock Exchange, Monday, Nov. 18, 2013.
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Now is a good time for Internet companies to go public as a bullish market drove the Dow Jones Industrial Average to a record 16,000 on Monday before falling back slightly at the close, but tech investors are not partying like it's 1999- a time when the dot-com bubble of wild speculation swept the market.

The S&P 500 also reached 1,800 for the first time, buoyed by companies like Boeing, which rose 1.68 percent to $138.36 on Monday following news that the company will sell hundreds of its new 777 jets. Declining social media stocks dragged down the Nasdaq Composite Index from reaching 4,000, which it has not hit since Sept. 2000.

Social media stocks rose last week but on Monday that rally lost steam as Twitter plummeted 6.46 percent to $41.14, Facebook dipped 6.49 percent to $45.83, AOL dropped 2 percent to $45.18, and LinkedIn sank 3.89 percent to $222.07.

[READ: Stocks Hit Milestones, With No Sign of Stopping]

 

In the next "two to three months" Twitter will likely level off to just above $26, which was the initial value the company set before trading began on Nov. 7, predicts Santosh Rao, senior equity analyst and head of research at Greencrest Research financial analysis firm.

"The positive feeling toward social media stocks is there, but those stocks are going to fluctuate a lot since there is a lot of speculative money flowing," Rao says. "The market is very frothy right now."

Despite this decline in social media stocks, 2014 will likely see a boom of Internet companies going public while investors are optimistic enough to bet on companies that have not yet generated profit, including Twitter, says Nicholas Colas, chief market strategist at ConvergEx Group brokerage firm.

"When the stock market is running hot and heavy the IPO calendar does as well," Colas explains.

E-commerce website Alibaba is poised to go public in 2014, which could generate a huge payday for its investor Yahoo. Former Twitter CEO Jack Dorsey may also be planning to take his digital payment company Square to an initial public offering in early 2014. The hot time for IPOs from Internet companies conjures fears of a bubble, but "there are nowhere near as many" examples of Internet companies rushing to go public as during the dot-com boom between 1997 and 2000, Colas says. The fact that non-tech sectors including finance and retail have helped the market prosper is also a sign that Wall Street is not speculating too heavily on tech stocks, explains Colas, who was a portfolio manager at SAC Capital in 1999.

"I can tell you that right now we do not have the same frothy movements as in the 1990s," Colas explains. "The worry that is totally justifiable is that we are not in a bubble yet but we could be headed for one." A bubble could result if investor enthusiasm for Internet stocks results in too much speculation, and the market could also dip if the Federal Reserve decided to scale back its bond purchases, Colas adds.

[READ: Square May Follow Twitter Into IPO in Early 2014]

When the dot-com stock bubble hit bottom in 2001 some Internet companies including Pets.com went out of business. Companies including Amazon saw their stock values fluctuate wildly during the bubble. After launching in 1997 Amazon's stock reached approximately $105 per share in April 1999, before falling to $6 in Sept. 2001, although the company survived to prosper, with its stock valued at $366.18 on Monday.

While suggesting Wall Street is not undergoing a tech stock bubble, Scott Kessler, head of Technology Sector Equity Research at S&P Capital IQ, says investors may be looking at success stories like Amazon and extrapolating its performance to newer public companies like Twitter.

"There is this fear of missing out," Kessler observes. "People are more concerned about losing out on stock appreciation than about investment losses."

That excitement may be causing speculation on a limited number of stocks in areas including social media and cloud computing, so Kessler says "it is a stretch," to compare the current tech boom with the 1990s dot-com bubble.