We have seen it before. Too much money chasing one particular market segment creates unsustainable valuations that eventually come crashing down — the medical services roll-up boom and bust of the early 1990s and the dot.com era of the late 1990s.
Medical Design Magazine posted an article earlier this month that points to another possible segment that may be suffering from overvaluation. The story says that as of 2004, 85% of market capitalization in medical device companies was supported by intangible assets. These intangible assets are the speculative part of any business valuation. It is that part of the valuation that predicts what the future might hold.
If speculation proves correct, vast fortunes can be created.
If speculation proves to be unrealistic or just plain wrong, these values can come crashing down. Physicians who sold their practices for stock in the roll-up companies of the early 1990s experienced first-hand what happens when billions of dollars in market cap vanish. So did the millions of people who bought into the intangible assets of the dot.com’s. Wealth that was only on paper disappears.
We do not know if this is an overvalued market, or one that has incredible up-side, but it certainly bears watching.
(Thanks to Dr. Jim Stefansic for passing this along).
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