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Don’t call it the next tech bubble – yet

Signs of exuberance are everywhere: Tesla roadsters, soaring real estate, overpriced vinegar – and eye-popping valuations for pre-IPO companies like Facebook and Zynga. So why are so many Silicon Valley denizens reluctant to use the B-word?

FORTUNE — Michael Dreyfus, 49, is a leading real estate broker in the heart of Silicon Valley. During the winter he sensed the housing market was coming back, though he hadn’t a clue what he’d be in for. In February prospective sellers came to him with a listing for a perfectly respectable property in Palo Alto: four bedrooms, three bathrooms, 7,500-square-foot lot, needs work. He recommended that the sellers ask $1.9 million. When the house went on the market in April, they had bumped the price to $2.3 million. Seven offers came in above that price; $2.7 million won the frantic bidding. Several buyers attempted to make offers even as the broker was supervising repairs to a kitchen flooded by a burst pipe. What’s a little leak when the price tomorrow may hit $3 million? “We live in an alternative universe here,” Dreyfus acknowledges.

Welcome to the Bizarro World of Silicon Valley Summer 2011, where financial fervor is fueling yet another real estate boom. Billions of dollars in fresh venture capital is being invested, and tech IPOs are hitting the stock market weekly. The rest of the country may be in the economic doldrums, but here the winds are fair and the sails of the newly rich captains are full. Entrepreneurs are pulling out fresh business plans; more angel investors are getting into the pre-IPO action; exuberance fills the Northern California air. Is the surge the beginning of a new, lasting wave of good times to wash over El Dorado, or is it the harbinger of the latest speculative cycle?

Consumer sites like LinkedIn (LNKD) and Pandora (P) have gone public recently, with multibillion-dollar valuations — and without the profits to justify it (at least using traditional metrics). LinkedIn has been trading at 750 times its estimated 2012 earnings — as the rest of the market trades at barely 12 times forward earnings.

Just last week, Zynga filed for a $1 billion IPO. The fever is contagious: Groupon, based in Chicago, is sure to have an IPO shortly, and Washington, D.C.–based LivingSocial, the No. 2 local-commerce website after Groupon, may file soon too. And everybody expects an IPO from Facebook by early 2012. Its valuation, based on trading in private secondary markets, has surpassed an astonishing $80 billion, which puts the seven-year-old company in the same financial league as established public operations like Amazon (AMZN) and Cisco (CSCO).

Microsoft’s acquisition of Skype has similarly furrowed brows. Chinese Internet companies, listed on American stock exchanges, are another marker of enthusiasm possibly gone awry. For example, (YOKU), hyped as the YouTube of China, went public in December at $12.80 and approached $70 in April. In June it had sunk to near $25. You could argue the stock had returned to normalcy — or instead that a little bubble had popped, and when it did, it popped big. has become its own cautionary tale. It announced in the spring that it had raised $41 million for a “miraculous” free app for smartphones that would allow users to share snapshots. Yet when the app launched, it was a bust.

The swell in IPOs isn’t limited to splashy social-networking companies. IronPlanet, based across the bay from Silicon Valley in Pleasanton, is as unsexy as it gets. It conducts online auctions worldwide for heavy equipment, like a Caterpillar (CAT) backhoe loader or a John Deere (DE) crawler tractor — and plans to go public this summer. Overall, more than 50 tech IPOs are expected by year-end — coincidentally, or ominously, the most since 2000. Proceeds from IPOs this quarter — nearly $12 billion so far — are already more than double last year’s total. Venture investment for 2010 was $23 billion — nowhere near the $99 billion of 2000 but far above the $10.5 billion of 1996.

From the tech boom’s epicenter in and around Palo Alto to the neighborhoods up the peninsula in San Francisco, the newest paper Siliconillionaires are everywhere. “It’s too hot,” says one VC whose firm has invested in a dozen IPOs over the past year. He’s telling me this on a recent Tuesday night during one of Silicon Valley’s elite poker games — in which he’s proving he’s quite adroit at placing bets.

“The valuations are very high and discount too much risk. Too much late-stage money is flowing in — and much of it from other dotcoms, which have lots of their own investment money coming in, so it’s circular.” The exuberance reminds him of a time not so long ago — barely a decade — when the dotcoms and the stock market and the Valley came crashing down. On March 31, 2000, the Nasdaq (COMP) peaked at 5132. At 2800 or so, it’s still barely half that now. Nonetheless, warns the VC, “the analogies to the last bubble are unavoidable.” (For such analogies, see charts below.)

Boom and bust: The way of the Valley

The Valley is the land of fear– and greed and fantasy and optimism. All four live here. Fear settles for that bungalow in the humble part of Palo Alto — modest as it is, it’s yours for under a million bucks. Greed enjoys the finer things in horsey Woodside, in a megalo-mansion so big it ought to have its own gift shop. Fantasy drives a Ferrari (or if you’re Oracle (ORCL) CEO Larry Ellison, the $1.6 million, 1,001-horsepower, 253-mph Bugatti Veyron he uses to commute). Mere optimism drives a Subaru. The calculus among fear, greed, fantasy, and optimism — for which there’s no Google algorithm — pretty much determines whether Silicon Valley is in a state of boom or bust or somewhere in between. Along Sand Hill Road, the mother lode of American venture capital, you can see both late-night fluorescent lights as well as SPACE AVAILABLE signs.

Only three years ago the place was altogether miserable. The recession of 2008 paralyzed venture capital and strangled growth. The investment community’s despair was symbolized in October that year in a 56-slide PowerPoint that Sequoia Capital presented to its portfolio companies. Sequoia is one of the Valley’s most successful VC firms. Its gloom-and-doom presentation of graphs began with the photo of a gravestone marked R.I.P. GOOD TIMES. It was all downhill from there, as images of a hog carcass and a skull and crossbones titled DEATH SPIRAL followed. “Get real or go home,” Sequoia counseled.

Boom and bust has been the way of Silicon Valley — as it’s been for all California since the Gold Rush. Genentech in the 1970s launched the biotech industry. Intel (INTC) and Apple (APPL) gave birth to personal computers. Netscape created the modern web revolution. Companies thrived, then hit the inevitable hard times. Some recovered, and some vanished — like Netscape, whose IPO in 1995 was a $2.3 billion sensation, only to be obliterated by Microsoft (MSFT) in the “browser wars.” Companies like — going from IPO to liquidation in 269 days in 2000 — became a laughingstock; it didn’t help that its spokes-pet was a sock puppet.

Netscape’s highest public valuation obviously pales in comparison to Facebook’s current evaluation — or even Twitter’s private valuation at about $8 billion based on secondary-market action. The argument for big valuation — and against Netscape’s way back when — is that the current generation of dotcoms have better business plans and rely on more than mere “eyeballs” to measure potential profitability. The stock of Netflix (NFLX) seems to go straight up — 50% this year — but nobody would question its billions in revenue or that it’s the Bigfoot of online movie rentals.

Who’s correct? For any 10 people you ask, you’ll get 11 answers. Reasonable folks can disagree about the prospects for boom or bust. But their reckoning is about psychology more than economics. No bubble announces itself. The sun dazzles right now — but does it beckon brilliance or portend darkness? A sure sign of budding bubbliness is the rush to find alternative metaphors. Read the blogs, attend the tech conferences, sit at a Starbucks (SBUX) for an hour in Sunnyvale some afternoon — you’ll hear most of them. There’s a wave — ride its crest, but don’t get inundated! There’s froth and ferment. There’s a rush and a gush. Our favorite, from a well-known investor: “The cuckoos have come out of the clock!”

The consensus is that there remains sufficient fear in the marketplace — be it on Sand Hill Road or Wall Street — to prevent exuberance from becoming totally irrational. For there to be a bubble, the wisdom goes, greed must overcome fear. And for the moment fear still rules, which means the memory of 2000 lives. Metaphorically, we may be in only 1995 or 1996. After all, LinkedIn is not — whatever its “true” valuation should be, it has a real business that it expects will turn a profit next year. And consider the sorry trajectory of MySpace, which used to be Rupert Murdoch’s social-networking baby that was going to compete with Facebook. He bought it for $580 million in 2005. He just got rid of it for $35 million. Economic history surely repeats itself, so there’s nothing new — the key question is how quickly it will repeat.

“I think it’s a wanna-bubble,” says longtime Valley observer Paul Saffo. “Investors are desperate for something — anything — with a prospect of returns, and there is a lot of hot money looking for a home.” Investor Marc Andreessen — the former boy wonder of Netscape who in 1996 posed on the cover of Time on a throne — delivered a controversial speech in May pooh-poohing the idea of a bubble. “A key characteristic of a bubble is that no one thinks it’s a bubble,” he argued. “If everybody’s upset, it’s a good sign.” It’s a reasonable point, except prognostications of a high-tech bubble were surely out there in 1999, just as some talk of a housing-market tumble preceded a housing-market tumble in 2008. As Randy Komisar, a partner at Kleiner Perkins Caufield & Byers, says, “The only foolproof indication of a bubble is when you hear it pop.”

Even so, Andreessen is correct to note that whatever enthusiasm exists for companies like professional-networking site LinkedIn — golly, yes, his firm happens to have money in it — has not extended to most old-line tech companies. That’s partly because the market darlings of the moment — social and mobile media — are consumer-oriented. Price/earnings ratios remain relatively low for business-to-business tech companies like Cisco, Hewlett-Packard (HPQ), and Microsoft. Apple’s stock, high as it is, trades in line with the market, and even Google (GOOG), the IPO phenomenon of 2004, is a third off its all-time high. By contrast, in the late 1990s — metaphor alert — the rising market tide lifted all tech boats. Optimists say the tide is still flooding. “I think it’s more a beacon,” says Marc Benioff, CEO of cloud-computing juggernaut Salesforce (CRM), which happens to be an enterprise tech company on the ascent. “We’re ready for the next wave.”

A bidding war for top talent

Travel round the valley, and you can see what worries the poker-playing VC. It isn’t just about high valuations and too much investor money chasing too few sound deals. Nor is it only about a rush to take questionable companies public. There are also cultural data points that are unmistakable: fast cars, homes priced for Marie Antoinette, and numbered bottles of balsamic vinegar from Italia.

Barely presentable engineers just out of schools like Stanford and MIT are commanding higher beginning salaries than lawyers. (Yes, some might call that progress.) On Highway 101, the main drag of the Valley, billboards compete to attract engineers. Groupon now has a giant help-wanted ad; those few in the Valley who value irony would appreciate that it’s almost across the road from the old Ampex sign, which remains despite the disappearance from the area of the once-great audio-and-visual pioneer.

Bidding wars for the next extraordinary engineer — someone who’s content to be an employee with some options, rather than immediately getting into the startup game — have resulted in salaries as high as $250,000. That’s almost double what top talent got in the late 1990s. At Facebook prized engineers have left, using secondary markets like SecondMarket and SharesPost to liquidate their stock options in the still-private company and then go off to startups.

What IPOs used to do almost exclusively now sometimes happens in that burgeoning and largely unregulated marketplace. (Other early Facebook employees have partially cashed out as well, as have some investors who want to minimize their financial risk should valuations implode.)

Though LinkedIn’s parking lot in Mountain View features more Priuses than Porsches, it’s the lone Lamborghini that gets the most gawks. It’s owned by a designer who went to L.A. to fetch his new car — so he could have it in time to show off at Facebook headquarters for President Obama’s April visit.

The gawks might reflect disdain more than envy — flamboyance isn’t what it used to be in the Valley — but if the Google lot across the street is any indication, some LinkedIn employees will be driving in style as soon as their options vest. Of the roughly 1,300 pre-IPO employees at LinkedIn, the vast majority became paper millionaires the day of the offering. Leaving aside the executives, the shares of the rank and file were worth as much as $190 million. (Co-founder Reid Hoffman became a multibillionaire that day.) The Tesla (TSLA) showroom in San Jose buzzes with young techies. One of them, at LinkedIn, showed the Valley’s idea of restraint: He waited to buy his $100,000 electric roadster until the social-networking site went public in May.

Boom begets boomlet

Maybe they’ll buy themselves nice places to live. Real estate has always been a bellwether of expectations. Brokers say they can take the economic temperature of the Valley based on the housing market alone: Do properties get multiple offers? Do sellers dither? Are buyers mostly engineers who ask more about the wiring than the neighbors? Dreyfus, the Palo Alto broker, says housing is “really hot” in premium areas of the Valley — the best since boom days in the late “wacky” 1990s (though not yet at the prices of those days gone by).

What especially surprises Dreyfus, he says, is that so many buyers are from elsewhere — particularly New York and London — filling the management ranks at expanding social-network companies like Facebook. Buyers at the top end of the market — above $5 million — often pay all cash. Because newly flush employees at companies like LinkedIn cannot sell any of their shares for at least 180 days after the IPO, those employees have yet to hit the Sunday open houses. The marketplace may therefore get hotter still, fueling perceptions of froth.

Just as in Hollywood, where homes of the stars are noted on tourist maps, in Silicon Valley everybody keeps track of the techelebrities settling down. No purchase was pawed over more than that of the 27-year-old Zuckerberg, the co-founder of Facebook who’s worth north of $14 billion. Once upon a time young masters of the digital realm shared a rented apartment with a roomie and pizza boxes. According to real estate filings, Zuckerberg this spring spent $7 million on a 5,600-square-foot, five-bedroom, 51⁄2-bath home with a pool and spa. When news of the sale broke in May, a TV newscopter provided aerial shots. Zuckerberg wisely didn’t voice any complaints about privacy.

Built in 1903, the clapboard-sided house is in the Crescent Park section of Palo Alto — not quite the registered historic district of Professorville within walking distance of downtown but closer to Facebook’s planned new headquarters in Menlo Park. The $7 million price tag doesn’t buy much. Zuckerberg’s parcel is barely half an acre, and for that kind of money he could have gotten an estate plus a barn in nearby Woodside, to house the pigs, chickens, and goats he now kills for dinner. In the past six months the median price of a home in Palo Alto has risen 24% to $1.2 million, according to DataQuick. Dreyfus says his own statistics in May showed only a 27-day supply of homes for sale — assuming one home sold per day. A year earlier, supply was three times that.

In the San Francisco real estate market, which isn’t typically linked to the Silicon Valley economy, brokers have likewise sensed a boomlet. “San Francisco is an island, with limited inventory,” says Grace Shohet, a broker with Hill & Co. “Even eight to 10 people with an extra million dollars in their pocket can move the market.” She says that $1 million could buy you a two- or three-bedroom condo in a pretty good neighborhood like Noe Valley. When she sought to rent out her own home last month, two groups of engineers — rather than families — made the best offers. On the same block, a “nest” of 13 Google summer interns is renting a mini-mansion they found on Craigslist; they each pay from $850 to $1,150, depending on proximity to the refrigerator.

No matter where they live, everybody has to eat. And there’s no better place to do your grocery shopping than Draeger’s. At the Menlo Park branch, just over the tracks from Palo Alto, there’s the usual assortment of $1,750 Château Petrus and $15-an-ounce duck foie gras — and even the Acetaia Terra del Tuono balsamic vinegar that’s been “aged for a long period of time” and goes for about $40 a teaspoon. Overheard in the sweets aisle, from a twentysomething in a T-shirt and flip-flops: “My company’s so successful now I can buy any candy I want!”

Echoes of a headier time

Lou Montulli knows bubbles. He was a founding engineer of Netscape, who had to borrow money to fly in for his job interview with Netscape bankroller Jim Clark. At 24, after the IPO, Montulli became a multimillionaire. Though never achieving Andreessen’s fame, he was the inventor of “cookies” in browsers — and also was an early web folk hero because he stocked the Amazing Fish Cam, now the oldest cam online. The 600-gallon aquarium it watches is next to Montulli’s cubicle in his latest startup,, a data backup and storage company.

Now 40, Montulli doesn’t yet see many signs of a bubble, but he hears echoes of the times of Netscape. “There’s still conservatism in the Valley,” he says. “There’s a lot of money chasing a very small number of companies — those that actually show traction and are achieving real revenue and massive numbers of users. Those are the companies now getting bid up.” The question, he says, is whether those valuations — born in part of scarcity — eventually will affect all those lesser companies around which fear still prevails over greed. He senses less fear of late.

At that weekly poker game, often at Montulli’s house, he does okay. He wins some of the time, he loses some of the time. But the big winner at our game a few weeks ago, naturally, was the venture capitalist, who took home $1,300. “When the sun shines,” says the VC, “you harvest your crop.” Spoken like someone who well understands the nature of Silicon Valley.

–David A. Kaplan wrote The Silicon Boys, a national bestseller, in 1999 — the peak of the last bubble.

–Alex Konrad and Michal Lev-Ram contributed to this article.

–This article is from the July 25, 2011 issue of Fortune.