Tech War Chests May Prevent Stock Bubble

Survey of tech firms show businesses are saving cash compared with firms during the 2000 stock bubble.

Twitter CEO Dick Costolo, Twitter co-founder Jack Dorsey, and Twitter co-founders Evan Williams and Biz Stone applaud as Twitter rings the opening bell at the New York Stock Exchange on Nov. 7, 2013, in New York City.

Large cash reserves could provide to stability to tech companies like Twitter, which went public late last year.

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Wall Street is in the sixth year of a bull market with record highs on the backs of Internet company stocks, but that momentum has also stoked fears of overvaluation that led to the 2000 tech stock meltdown.

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Fluctuating share prices of Internet companies including Twitter in recent months have some economists fearing reckless hype will lead to a crash, but a new survey of tech firms conducted by The Wall Street Journal shows those companies have more cash reserves than their industry counterparts from 1999. The war chests of a company are not a definitive way to predict stock performance, the Journal cautions, but it shows tech companies today are more mature compared with businesses that rushed into initial public offerings ahead of the 2000 crash, when some young Internet companies including went out of business.

The 148 companies with recent or pending initial public offerings surveyed by the Journal were budgeting well enough in 2013 to keep cash reserves through 2014, with only 29 percent spending more than they made, according to their own self-reporting. In contrast, the Journal analyzed companies that went public from 1996 to 1999, when 67 percent of the 525 tech companies were spending more cash than they made, with 16 percent on track to run out of cash within a year, based on their cash balances and spending pace at the end of 1999.

Internet companies are also becoming more mature when they go public, evidenced by Twitter’s disciplined courtship of Wall Street firms ahead of November in an effort to avoid the lack of investor confidence that Facebook encountered after its IPO in 2012.

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Failures of overhyped social media startups has also inspired Internet entrepreneurs to improve business plans with less hype and more substance than some companies that rushed into the market between 1996 and 1999.

The current bull market resembles the pattern of the '80s boom in some ways as there is a rush to get into the market now that the economy is improving, but as Wall Street becomes more confident it will more likely result in a correction – a dip in prices after a peak in share value – rather than a crash, James Paulsen, chief investment strategist at Wells Capital Management, has said.

This current growth market has already seen at least a dozen corrections that have acted as steam release for a dramatic plunge in prices, Paulsen has said.