Lavish parties, business class on the Concorde, desk-side massages — such excesses defined the late 1990s tech boom, when even the most dubious of ventures could draw bundles of venture funding and ultimately go public. It all came crashing down at the turn of the century as former high-fliers like Pets.com, Boo.com, eXcite and Flooz filed for bankruptcy.
Fast forward to 2015. Silicon Valley is now sustained by real companies with real profits, like Apple, Oracle and cloud players such as Salesforce. But irrational exuberance may be creeping in elsewhere. In the run up to Chinese New Year, tech companies in the People’s Republic have thrown bashes that make some of the dot-coms’ most indulgent bacchanals look tame.
Search giant Baidu jammed employees into Beijing’s Capital Stadium for a do replete with belly dancers and execs belting rock tunes from the stage. Antivirus developer Cheetah Mobile gifted BMW X1 SUVs to staffers in lieu of the traditional, cash-stuffed red envelope that the Chinese exchange at New Year, and a Shanda-backed startup gave Teslas to some lucky workers.
Are such indulgences justified, or is China’s tech industry setting itself up to repeat the dot-coms’ fate?
Record Funding Hits Mainland
There’s no shortage of funding. Total venture money in Chinese companies rose to $15.5 billion in 2014, a record, according to Dow Jones VentureSource. Smartphone maker Xiaomi raised $1.1 billion and rideshare app companies DiDi Dache and KuaiDi Dache raised $700 million and $600 million, respectively. Big names like Alibaba and China Mobile, meanwhile, have raised billions in initial public offerings.
But unlike the dot-coms, observers said most of these companies have real revenues, profits and growth prospects. Baidu in its most recent quarter reported that operating profit was up 7.8 percent year-over-year, to $74.8 million. Alibaba saw revenues grow 40 percent in its most recent quarter, while China Mobile’s net income was $13.2 billion for the first nine months of 2014.
“I do not think there is an Internet bubble crisis now. In 2000, most Internet companies were losing a lot of money,” SoftBank Corp. CEO Masayoshi Son told investors recently at the company’s latest earnings conference, in response to a question on a potential tech bubble in China.
Not that there aren’t some troubling signs. A number of China’s listed companies are carrying price-to-earnings ratios that would make even the biggest dot-com flops blush. P/E shows how much investors are willing to pay for current and anticipated future earnings. The higher the P/E, the more speculative the stock. Baidu has a P/E of 36, social and gaming platform Tencent is close to 45 and Alibaba is almost 48. At the height of the bubble, the S&P 500 traded at about 30 times earnings, according to Bloomberg.
Echo Of Silicon Valley In The 90s
But there are important differences between the late ‘90s in Silicon Valley and China in 2015. Most significantly, China’s tech companies have a domestic market of 1.36 billion that has plenty of room for growth for devices like tablets and smartphones, and services like electronic payments. Additionally, many companies’ offerings require little overhead and are quickly monetized, like ride-sharing apps. DiDi Dache and KuaiDi Dache recently raised $700 million and $600 million respectively.
KuaiDi and DiDi announced a merger last week that valued the combined entity at $6 billion. In comparison, Uber, which has raised about $4 billion since its founding in 2009, is valued at $40 billion.
2014 was also a blockbuster year in China for technology mergers and acquisitions, but, unlike 2000, it was not a bubble, consultancy EY, said in a press release on Jan. 27. The total of disclosed-value deals in 2014 was $237.6 billion, higher than any year on record except 2000.
“Despite the occasional moonshot from a handful of deep-pocketed buyers, the vast majority of deals were measured in reality-based multiples of good-old-fashioned revenue, profit or cash flow,” the consultancy said.
Some high-profile investors are equally convinced that China’s tech boom is for real. One of them is Softbank’s Son, one of Japan’s richest people, who has led investments in local mobile and technology startups across Asia. “This time, people have learned from their experiences. Most of the Internet companies are now making profits. People are more experienced and educated. So this time I don't think it's an Internet bubble in general,” Son said.
World's Most Valuable Tech Company
When Xiaomi raised $1.1 billion in its most recent funding round, it was valued at $45 billion, making it the world’s most valuable privately held technology company. But that feels justifiable. Xiaomi outsold Samsung Electronics in 2014 to become China’s top smartphone maker, only four years since it was founded in 2010.
Xiaomi’s 2014 revenue rose 135 percent to 74.3 billion yuan (about $12 billion) before taxes from 2013, chief executive Lei Jun said in January, valuing it at 3.75 times revenues, putting it in the same ballpark as Apple, which is valued at about four times sales.
Meanwhile, despite slowing growth in China, the country’s financial system is maturing and an ongoing shift from over-investment in export-led growth toward domestic consumption will continue to support VC investment in consumer and business services, EY said in its 2014 Venture Capital Review.
So, for now at least, China’s newly public stock-market darlings and VC-backed up-and-comers can party on.