When Will the Tech-Stock Boom Go Bust?

NEW YORK (TheStreet) -- Many investors would agree that there is now a significant bubble in social media and Internet stocks.

The party continues. Amazon (AMZN) now has a price-to-earnings ratio of nearly 1,000, based on 2015 earnings estimates from analysts, while LendingClub (LC) and Twitter (TWTR) don't even have real price-to-earnings ratios, because both companies are expected to report losses for 2015.

On a fundamental basis, such valuations are only possible if you believe in enormous growth for these businesses' volumes, along with (in Twitter's case) miraculous growth in advertising revenue and the advertizing market generally.

This does not mean, however, that you should sell short these stocks (or at least not yet). The herd driving up the value in these stocks could continue running for a very long time indeed. In fact, one might be foolish to sell short these stocks now, because irrationality in the market often last longer than one might think.

But a tipping point will come eventually. It always does with bubbles. The billion-dollar question is when.

The minds of men are inscrutable and hidden, but one can still come up with some pointers here.

Part of the way to think about this is to look at some of the research that has been done comparing the mass spread of ideas to viruses. See Malcolm Gladwell's Tipping PointRichard Dawkin's "memes" or Robert Shiller's writing in the revised edition of Irrational Exuberance.

What triggers one virus (i.e., ideas interpreted as social viruses) to spread rapidly across society and others just to die out? The mass hysteria around social media and Internet stocks is a virus of one kind, but the inevitable crash (and then likely overcorrection) will also be a mass social virus of another kind.

Remember, most of the investors pouring into these stocks (even at the pre-IPO venture capital stage) have no real clue whether they are investing in transformative businesses.

They are hearing from many others and from the media, however, that these businesses have unique technologies or have "disruptive" features. This is exactly the "conceptual virus" that grips them to buy the stocks.

Of course, at some point another virus will eventually spread like wildfire, pushing the herd to sell these stocks. As Shiller has said, the virus analogy is particularly good for today's world because with modern media, a much wider (and often uninformed) portion of the public is often involved in stock investing.

Shiller argues that this broader group is particularly sensitive to mass communications and hysteria. He says that these viruses effectively crowd the smart money out of the market, and so naturally the market becomes increasingly irrational and volatile. The spread of news due to modern media forms (e.g., the Internet and social media itself) only exacerbates these factors.

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