Are we witnessing another bubble? A bubble, of course, occurs when everyone from those with no experience to the most sophisticated investors decides they need to own a piece of whatever the crowd is excited about.
One of the earliest, and most famous, bubbles was the Dutch Tulip Bulb scandal that took place in the 17th century. Apparently tulips had never been seen in the Netherlands, and when just a few were introduced, Dutch citizens – some of them, at least – wanted the bulbs so badly that prices almost literally went through the roof. Although some of these stories have been debunked, it was said that some people were willing to trade their homes for one rare bulb.
When Facebook went public with its initial public offering in May 2012, there was a feeding frenzy to get the stock at the designated price. The notion was swirling around that the stock could shoot up to $40 or $50 from its offering price around $30. Unfortunately, Facebook dropped when it came out, although it recovered and moved higher months later.
Do you think the future for electric cars is so bright that Tesla Motors, with no earnings at all, should be selling at $173 a share? Tesla has tripled since April and shows no sign of stopping. The wildly high valuation puts the total market value of Tesla at $21 billion. That puts it close to, or higher, than the total value of General Motors.
But there’s more to come, according to projections from brokerage firm Jeffries and Company, which sees the stock at $210 within 12 months. Another brokerage firm, Wedbush Securities, recently raised its 12-month target to $240 a share. Again, that’s for a company with no earnings whatsoever.
Now on the near horizon, investors are waiting for the initial offering of Twitter. Twitter apparently has told its investment bankers that they want their shares to be offered at a “reasonable” price between $17 and $20 per share. The question that should be asked is whether companies such as Facebook, Twitter and mobile Internet company Pandora will grow into profitability at a great enough amount to justify their current prices.
I have to confess that I am not a great judge of future stock prices. Many years ago I bought Apple at around $8 a share, and when it got to $11 or $12, I figured it was time to take a profit. I assumed that the IBM personal computer would dominate the market, crushing Apple in the process.
OK, it took quite a few years, but a few months ago Apple was worth more than any company in the United States.
One that I sort of got right was the first offering of Genentech – with a major facility in Vacaville – which came out, I think, at $35 and eventually moved up sharply.
But I am thinking of trading our house for this one-of-a-kind tulip bulb. What do you think?
Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.