Is The Snapchat IPO Proof Of A Tech Bubble?
This is exactly the spirit of Snap Inc.’s IPO, an opening of a new chapter in online-advertising and video communication between people, brands, etc. Even though Snap Inc. is not really the pioneer that Netscape was, it is reality that Snapchat is being posited as a revolutionizing company with millions of users, surfing on the out-of-the-box ideas where Snapchat is built upon. But are those ideas worth billions of dollars? Is the bubble inflating? Or to put it in Austrian terms, are we seeing unsustainable investments?
As Callahan and Garrison put it:
The IPO is significant because every bubble needs a story, which early investors can tell to later ones to justify rising asset prices.
The story of Snap Inc.’s IPO and other Tech IPO's such as Twitter’s, is clear: the revolutionizing era is here, it's time to get on the "app train." A business doesn't even need to be profitable, it just needs to fit in the "app narrative."
The Austrian business cycle theory explains one of the most important causes of such a bubble, the creation of credit by central banks. With the money presses at maximum capacity, the abundant credit doesn't know where to flow. We see bubbles everywhere, e.g., the housing prices reaching new heights and now, a large one in the "Tech-startup world." The rapid growth of the tech-companies, is being best explained by the Nasdaq Composite:
The worrying comparison with the 2000-peak should be writing on the wall, a warning that the policies like those of the Fed aren't really healing wounds - they're simply creating another bubble.
The very low-rate policies of the Fed have been delivering easy credit, indirectly, to a lot of companies such as Snap Inc., and directly, to the investors of those companies. Also, the deposit interest rates force households to invest their savings into shares or other investing options. The households who are normally not into investing in stocks, dare to buy some shares of their favorite company, so why not the stocks of Snap Inc.? This is just one example of the distortion caused by a radical, impactful, and disrupting inflating policy. The forming and inflation of a bubble is inevitable, with mere thanks to today's central-bank policies.