Does the Sale of Israel’s Viber Mark the Start of a New Tech Bubble?

Now that money is being poured into technology stocks, problematic pricing methods are back in fashion.

For the third time in less than a year, Israeli entrepreneurs have proved they can build a company worth around $1 billion. Within a few months last year, Google bought Waze for $1 billion, Wix went public and achieved a market value of just over that amount, and now Viber has been sold for $900 million.

Last week Google overtook Exxon Mobil to join Apple at the top of the list of the world’s most valuable companies. The last time two tech firms topped the list was in March 2000, as the Nasdaq briefly crossed 5,000 points before beginning a painful plunge ending two and a half years later at 1,200.

Could Rakuten’s acquisition of Viber turn out to be the height of another bubble? Viber has become a very strong consumer brand, but is it even worth $100 million, let alone $900 million?

For a sane board of directors to approve such an expense, it needs a very creative imagination. It also needs the vision to see how the new acquisition can help break into more markets, sell more products to existing customers and integrate into a moneymaking product line.

Goldman Sachs, Viber’s investment bank, did a great job of persuasion for the company, which has no revenue to speak of, much less profit. This means the $900-million valuation is based on estimated value per user compared to that of similar applications. Viber’s sellers convinced Rakuten that at $9 per user, the Israeli company was a bargain compared to WhatsApp’s $26 and Twitter’s $134.

Bankers’ habit of valuing a company by comparing it to similar firms harks back to the tech bubble, when more conventional measurements were harder to come by. Company values got inflated.

Now that money is being poured into technology stocks, this problematic pricing method is back in fashion. Over the past year many hot Internet stocks have more than doubled to record highs, including Twitter, Netflix, Yelp, TripAdvisor and even the great Facebook. The valuations of many Internet stocks are based on very optimistic forecasts, perhaps too optimistic.

The fact that Rakuten is pursuing an extremely aggressive acquisition strategy, buying pretty much whatever comes its way at any price, also helps explain the Viber deal. Rakuten isn’t Google, sitting on an enormous cash pile and buying Waze in order to keep a bitter rival like Facebook from encroaching on a strategic area. Rakuten’s conduct is more like that of another Japanese company, SoftBank, which in the 1990s was desperate to join the dot-com frenzy.

There are many good reasons for the recent shift, and I’m not predicting the rise of another tech bubble. But the signs are there, and the Rakuten-Viber deal is one of them.

Reuters