But you're not wrong, there is a difference: crap like Uber doesn't shoot to the moon on opening day. Or, as you put it, people aren't throwing money at them, hence Uber (et. al) still sitting under IPO price. That's what I think might save us from a repeat of early 2000s. Hair stylists aren't giving me stock advice these days, either.
Zoom and Pager Duty. To your point, everything else has been meh.
And of course there are a number of stable self-sufficient businesses who never report profits; in fact they are called nonprofits. The Sierra Club was founded in 1892, for example.
Call it what you want, revenue, profits, whatever, you are not sustainable if you don't bring in more than you spend.
If you spend more on marketing than the customer lifetime value, or if you have high churn, then yes, you have a failed business. But if you have reasonable marketing, high growth, low churn, then you will have a fairly incredible money printing machine in the future. And there are many people willing to give you $10 now if you promise a portion of this future profit machine!
This matters a lot for software businesses with recurring revenue (i.e. most SaaS businesses). With software, you build the software once and then you have an asset that you can sell a potentially infinite number of times, for many years into the future. The engineering salaries for building the software count as R&D, and get deducted from the current year's income statement. Then you sell the software, which may take an expensive consultative sales process but signs up a customer who will continue paying monthly for several years. The sales expense is recorded in the current year, but the revenue is booked over several years.
The metric you're looking for is unit economic profitability, and specifically for B2B software businesses, LTV - CAC. If this is positive, then you are making more for each customer you sign up than it cost to sign them up, and you have a sustainable business (at least until the competitive landscape changes, which is a risk every business faces). This is not the same thing as GAAP profitability: if you know that you have a product that makes $5 in revenue for every $1 in sales you put in, it makes sense to raise as much capital as possible, hire as many salespeople as possible, and get every possible user using the software before a competitor comes out. That will look like a money-losing business under GAAP, because for every dollar that comes in this year you might be spending $2 in sales. But the part that's missing from the GAAP statement is that next year you have 4x as many customers who will continue paying you money at no additional cost to you. At some point, when the growth curve flattens, you just lay off the salespeople and milk the existing customers for everything they're worth. This is the story of Oracle, Microsoft, Cisco, and now Facebook and Google.
VCs know to look for these metrics (along with growth rate, net promoter score, engagement, and churn, which are proxies for CAC and LTV). The general public does not, and they're not required in SEC disclosures or normal accounting statements (which generally predate the SaaS business model).
A business is either fundamentally profitable and sustainable, or it isn't.
Amazon has reported profits almost every year since 2003 (the only exceptions are 2012 and 2014). The loss accumulated in 1994/2002 was $3bn ($4.3bn adjusted for inflation). Uber has been losing over $3bn per year since 2016 ($15bn so far).
I think the main reason for this is that all the upside and speculation has already been taken by earlier investors and an IPO is done only when there is basically no upside left. In 1998 Uber would have gone IPO much earlier and retail investors would have driven up the price, not the VCs as it’s done now.
What’s common is that we have a lot of companies who don’t even have the slightest idea how to become profitable other than a miracle happening.
Not sure how this will end but judging from 2002 and following it won’t be pretty for a lot of people that are flying high in the current market.
Microsoft famously had a single venture investment for what amounted to less than 10% of the company (but did get a board seat).
Zoom and Twillio.
And lots of people pretty sure the whole thing was a bubble but almost feeling compelled to jump in anyway.
I'm not saying there won't be a correction at some point but you're mostly not seeing the wild price increases in the absence of any fundamentals and, in fact, the market seems to have mostly said "meh" to the Blue Aprons, WeWorks, and Ubers of the world.
In summary, smarter investors and better regulation seems to have kept the market in check, for now.
The troubles start when a sizable chunk of the market suddenly goes underwater, disrupting existing supply chains and shaking investor confidence and predictability. Those events have not yet occurred.
Today's companies , even if they have losses, are cash-flow positive. They are operating at a profit but reinvesting those profits on large capital expenditures, which produce losses. This is similar to Amazon, Tesla, Netflix, and Salesforce.
But they are going to coding bootcamps.
Every one remember 2008 and 2000. Beating the drum about a depression being around the corner, makes people takes preemptive decisions that stop such disasters from happening.
The seed of skepticism has been sown, and while I hope it doesn't grow, I am glad it has planted itself among people with power to swing economies.
The new wave "tech" companies, like Netflix and Tesla, haven't had a yearly profit yet.
And those are the best examples of "modern tech" (anyone who IPO'd after 2007). If we get into MoviePass, Uber, Lyft, Pelton, WeWork, etc. etc., we're into the "lose $4 Billion PER QUARTER" group.
Tesla "only loses $1 Billion/year" (roughly), making it a far more "profitable" company than these other ones.
I absolutely think we're in a bubble: driven by cheap debt. The problem is that I can't call when it will pop. Without knowing how or why things will pop, its completely useless to speculate. Stocks remain the best investment moving forward: with global bonds entering negative interest rates, and US Debt at record low-interest.
So even if I think there's a bubble, I'm pumping stocks because I don't have any better idea of what to invest into.
Tech companies make money because the cost of scaling a tech service to support more users is pennies on the dollar. Just spin up more servers - most of your expenses are fixed, regardless of whether you serve 2 users, or 2 million. This is why Wall Street fawns over them.
Unless Tesla has built a Star Trek replicator, it's not a tech company. It's a car company, that must spend 95 cents on building a car, to secure 1 dollar of revenue from selling it.
* Moviepass is a tech company, even though they were only selling subscription movie tickets.
* Peleton is a tech company, even though they sell exercise equipment.
* Tesla is a tech company, even though they just sell cars.
* Uber / Lyft are tech companies, even though they are just a middle-management service for... effectively Taxis.
* WeWork is a tech company, even though its business model is straight up commercial real-estate subleasing.
* Netflix is a tech company, even though it just spent a $Billion on studios, new TV shows, and other entertainment costs.
------
Everyone is a "tech" company. Because that's how you siphon off money from investors these days. Even Amazon seems to be turning into a glorified FedEx / Warehousing / logistics company.
When everyone is a tech-company, no one is a tech company. Its the nature of the current bubble IMO.
They just so happen to have a boring low margin retail business attached to it for legacy reasons.
But only made 90 Billion in "service sales" (AWS and subscription services). Note that Amazon Prime counts as service sales, so plenty of "product revenue" falls under the service boat in practice.
https://ir.aboutamazon.com/node/32656/html#sB4CED683083F59A8...
Amazon's storefront makes more than 50% of all of their services combined in profit, and is ~1000%+ more revenue. Yeah, it costs a lot to run the Amazon warehouses, but Amazon is still primarily a warehouse / storefront company by all measurements on their income sheets.
For 2018 actual operating income was $3.1bln for AWS and $1.078bln for global retail. (page 66).
Top line metrics are popular in tech circles because so many "unicorns" don't actually make any profit. But it will lead you astray if your goal is to actually make money.
[1] https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-b...
It's institutional investors (think pensions) chasing returns because of low interest rates.
PE's played a role in a lot of things we're currently seeing.
I wouldn't characterize its role in tech quite as propping up a bubble. Easy money means companies are trying a winner-take-all approach, loss-making longer, and delaying IPOs. Tech IPO performance has been mostly lackluster because of a lack of profits and private investors already captured gains from most of the growth.
Outside tech, they've been buying up medical companies, raising out-of-network rates, leading to surprise medical bills.
They're also under fire for leveraged buyouts, but turning around distressed assets is what PE's historically been good at, and for all the noise about leveraged buyouts and store closures, these were already sinking ships. PE didn't kill Toys R Us, Amazon did.
Now it's ICOs...
But that doesn't give me comfort because from what I've seen before every crash people said to themselves: "this time it's different."
Investors signal they approve of this strategy by continuing to invest in Netflix, despite not getting juicy dividends.
Netflix could massive reduce spend on OC and payout dividends, but that would be ultimately damaging to the long-term success of the company.
[1] https://www.macrotrends.net/stocks/charts/ROKU/roku/net-inco...
[2] https://www.theverge.com/2019/2/6/18214331/spotify-earnings-...
The angle where something like this could happen would be the advertising bubble, if there is one, collapsing. Then there are many companies who are currently quite solvent and profitable that suddenly wouldn't be.
SQ, SHOP, TWLO, WDAY, NOW, OKTA, TEAM, MRVL, SPOT, SPLK, PANW, DOCU, TSLA, ROKU, DXCM.
These are all $10+ billion market cap and negative earnings. There are tons more in the 5-10 billion range.
1999 was full of companies where even if they had captured 100% of the relevant market at the time, would still not be turning a profit or be viable businesses. They were fundamentally built on the presumption that 2015-levels of internet penetration and hardware capabilities in the first world would be obtained in 2001 or so. It wasn't just a matter of "they were investing what could have been profits into further growth", it was a lot more like "they were taking VC money and setting it on fire and calling that a business model". It is not the same today. (Modulo my caveat about advertiser money above.) It may be bad. But 1999 was insane.
I can easily see a correction, even one we'd consider large. But I would bet the "correction" doesn't undo more than two years of stock market growth when it happens, and it may not even manage to cause a recession, or if it does, a very minimal one.