Are we entering another bubble?
davidgildeh.com
davidgildeh.com
It's obvious in hindsight, but apparently it wasn't in the present.
While there are isolated instances of on-the-face bizarre valuations, such as Instagram or color.com, the prevailing actors in the market are actually making money.
In other words, if this bubble pops, who will loose out? Will it have catastrophic consequences for the economy at large?
Take Facebook--$100 billion valuation, more than Unilever, Anheuser-Busch, Amazon, McDonalds, or Cisco. Seriously?
The valuation may or may not turn out to be overly high right now, but it's by no means insane.
How much is it worth to know everything about a 20-something buried under a mountain of student loans, who is not inclined to buy expensive furniture, stereo systems, or cars anytime soon? Hundreds of dollars? Really? Add to that that the tech trendsetters and early adopters are not enthusiastic supporters of facebook anymore and seem ready to jump on the next big thing.
When I read the story yesterday about the company wishing to mine data how many people have sex in the bathroom after hooking up through the site, I figured this whole obsessive data collection thing has jumped the shark a bit.
Maybe it makes sense for the moment - as in the absence of revenues, user profiles attracts VC - but it does remind me a lot of the bubble in early 2000.
Whether they should be or not, in your and my opinion, is not germane to the value that they have because of the fact that they are.
To declare unilaterally that Facebook is overvalued is a failure to see what's happening right before you. Note that I'm not saying it isn't overvalued, but just that Facebook is making money today, and they have a lot of upside that no other company has right now.
How does Amazon make money? I give them money, and then they ship me a book, or download me a book, or deliver me some groceries, or spin me up a server, or ship me a Mac, or handle my fulfillment if I'm selling stuff, or a million other things, most of them in sectors like retail and logistics that are proven cash cows.
How does Facebook make money? I give them money and they show targeted advertisements to people who mostly proceed to ignore them. What? How is that worth more? I'm not saying it's worthless, in fact the entire point of my argument is that even viable businesses like Facebook are overvalued. I'm just saying it is overvalued.
You say there's upside, but if you take all the upside in their current business model and make the entire world population Facebook users, it still doesn't add up. So then what? There's upside in expansion, perhaps, except that's limited because of brand perception and reputation--Facebook's reputation is comparable to that of cable providers and governments, which scuppers any expansion into mobile, for instance. But then you have to balance against downside, and current valuations seem to be ignoring that.
How does Google make money?
Human data is big business.
> You say there's upside, but if you take all the upside in their current business model and make the entire world population Facebook users, it still doesn't add up.
Talk about hand-waving. Have you actually done this?
Anyway, the burden is not on me to prove how Facebook's revenues can justify their market cap. They are still growing, and they're control over key portions of the internet is still increasing. There is absolutely no justifiable reason to believe that their current advertising model is their endgame. Google is obviously scared shitless of them enough to completely retool their entire strategy, and they are not exactly small potatoes.
I'm not running out to buy Facebook stock, but I think if you want to dismiss Facebook's valuation you need a stronger argument than "their current ad revenue doesn't scale".
Targeted advertising on search queries. Notably, people don't tend to ignore that quite as much.
Google is probably overvalued on their current business model too, but they don't have the reputation hit that Facebook does, and they do have the engineering talent to diversify. For instance, licensing software to build self-driving cars would also be lucrative. Google Glass would be lucrative as well.
> Talk about hand-waving. Have you actually done this?
OK, looking back, I overstated it a bit. Facebook's valuation makes sense if the entire world population were active Facebook users, but almost only then.
The most optimistic projection for Facebook's revenue is 5B for 2012, on less than 1 billion active users. Population of the Earth is just less than 7 billion. So let's magically sign almost all of them up for Facebook; that's 35B revenue, which is roughly a third of their valuation. (Well, not really--they aren't going to be as affluent as Facebook's current American and European users, so it won't be as lucrative to advertise to them.) Apple's annual revenue is about a sixth of their valuation. But Apple has a successful history of growing significantly new product categories, having introduced three in the last ten years. And Facebook doesn't have the entire world population signed up yet--presumably if they did, their valuation would rise more.
> Anyway, the burden is not on me to prove how Facebook's revenues can justify their market cap.
So it's up to me to prove a negative then?
> They are still growing, and they're control over key portions of the internet is still increasing. There is absolutely no justifiable reason to believe that their current advertising model is their endgame. Google is obviously scared shitless of them enough to completely retool their entire strategy, and they are not exactly small potatoes.
> I'm not running out to buy Facebook stock, but I think if you want to dismiss Facebook's valuation you need a stronger argument than "their current ad revenue doesn't scale".
More handwaving. Google became an advertising company twelve years ago and that's still the bulk of their business. Is Facebook somehow more likely than Google to build a new revenue stream in a shorter period of time? Are they more likely than Amazon to build new revenue streams, when Amazon has consistently and repeatedly done just that for 18 years?
There's a lot of upside open to Facebook, and nearly all that upside is priced into their stock. But there's also a lot of downside, none of which is priced in. Which is probably the defining characteristic of a bubble valuation.
And if you're going to attach that kind of unbounded upside to having so much data--well, why isn't Amazon valued more highly? Unlike Facebook, Amazon empirically knows what I actually spend money on. And they capture most of that value chain, instead of just targeting ads at me.
Bubbles aren't defined solely by the extent of their damage post-pop. They're defined by the delta between bubble valuation and real value. In admittedly simplistic terms: the size of that delta, multiplied by the number of people who buy into it, usually dictates the impact of the burst.
Right now, we're arguably in the early stages of a bubble. Almost everyone admits that startup valuations, not to mention a few recent, high-profile IPOs (Groupon in particular) are inflated. Money is easy.
I'd argue that today's operative question isn't "by how much are valuations inflated," but rather, "how many people are buying into them?" And where will the contagion spread from here?
We have a few troubling indicators. Celebrities like Ashton Kutcher are leaping into the angel and VC scene. I have nothing against Ashton Kutcher, but I do question his fundamental grasp of the technology business. And I wonder whether his sloshing easy money around the startup world is inherently constructive or destructive to rational valuations within that world. Furthermore, Ashton's just the tip of the iceberg. CAA, Hollywood's leading Hollywood talent agency, is launching a VC arm focused on tech companies. Precisely what a Hollywood talent agency understands about tech firms is anyone's guess -- but CAA has more money than God, is extremely well connected to investment banks and hedge funds, and could serve as a bridge to the general public's interest in tech equity. (We'll recall that the 1999-era bubble was marked by a similar influx of carpetbagging investors from outside the tech industry).
People often point out that the frothy tech startups of 2012 are fundamentally unlike the frothy tech startups of 1999, in as much as 1999's startups went IPO, and today's startups generally get acquired. This is fair. But in both cases, investment money became (is becoming) very easy and very loose. This leads to a propagation (and propping up) of fundamentally unsound startups. History indicates that, eventually, there can be so many bad apples in the batch that people stop being able to tell the good ones from the bad ones. That's when the trouble begins. We're not there yet, but why wait around and let it happen?
For me there's usually a trigger, which I think Instagram was, with some justification as to why this time its different, which for me is Cloud. The Cloud has triggered some early successes from really small teams which is only going to excite investors and founders more to launch even more start-ups which will inevitably lead to more weak ideas and a self inflicted bubble of selling to the greater fool once they realize half the new start-ups aren't going anywhere...
Also, on a side note: even though he'll never read this, I feel like I owe him a sincere apology for making a quick and general assumption about him. Seriously. More than happy to stand corrected about him personally.
I've always thought it interesting how 1999 is always the benchmark people use, and never any of the years prior when the bubble was forming. People's logic seems to be "Until we meet or exceed the apex of the last bubble (ie, 1999), we don't need to worry."
For example, let's consider the most recent housing bubble. The housing bubble was predicated - at least in the beginning - on the fact that populations are growing, but land mass (and livable land mass, at that) remains constant. If we work under that assumption, land is at a premimum, and therefore _in the long term_, it can only go up. However, the problem is that too much happened too soon, and it created artificially high prices.
The tech bubble of the 90s was largely similar. It was a case where any retailer could chuck a .com at the end of their name and make millions. The fundamentals, however, were largely correct. I do almost ALL my big-ticket purchases online. Amazon's online retail presence is huge and pervasive.
I believe we MAY now be in an "information bubble." This isn't the .com bubble of yore. Rather it is a battle for your information. Facebook's got a nice chunk of it, as does Google. Instagram had a nice chunk of your photos. Essentially, information is at a premium right now. To what end? I suppose that remains the deciding factor on whether or not we are ACTUALLY in a bubble. If the information can be monetized then perhaps what we are seeing is simply the markets catching up to the tech trends. Eventually it will slow down - but that's entirely different from a "pop."
The alternative to the above is that people start to realize that the information isn't wholly reliable, and can not be converted (easily - for now) into revenue. In that case I'd expect there to be a correction at some point. But I think the fundamentals are sound. Information is the currency of the future - especially as we become more and more connected.
My 2cents anyway.
Seriously. Bubbles are where you get paid outlandish sums to program computers for a living. They're where your silly web startup gets bought for $40M for no particular reason. They're where you watch your stock portfolio double in six months, then double again four months later. A Bubble is truly a great time to be alive.
The important point is to recognize a Bubble for what it is and don't make the mistake of thinking you're actually as rich as you seem to be. Cash out frequently into things that are actually worth money, and don't go buying that $1.6M house that you can "afford" with all this "money" rolling in.
It'll stop rolling in soon enough. Then most of it will roll back out. And if you stay smart you will have had an absolutely great time of it.
At least that was my experience in the late 90's, quadrupling the salary, being "one year from retirement", then unquadrupling the salary and having a regular amount of savings and a regular looking stock portfolio. But while it was happening, it sure was good.
Right now it's still just a bunch of rich guys investing, which won't effect the 99% when they lose money.
I'd like to see salaries return to the pre-dotbomb days 10+ years ago.