Is it a tech bubble? | Hacker News Reader

Is it a tech bubble?

cdixon.org

81 pointssethbannon69 comments

"Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E)"

Those are some nicely cherry picked examples of mature companies that have been around for a Silicon Valley century. But I don't think the bubble involves mature tech companies but rather is in the private markets for emerging tech companies. The recent IPOs are certainly indicators of this...

Linkedin - P/E: 940

Zynga - P/E: No earnings (6B mkt. cap.)

Groupon - P/E: No earnings (7.5B mkt. cap.)

Pandora - P/E: No earnings (1.5B mkt. cap.)

Playing devil's advocate I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth. A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet. Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable. Similarly, one might even argue that some of these companies are undervalued. Facebook's mindshare and ubiquitousness among the upcoming generation is without a doubt a new phenomenon, and so one could say that their current valuation approaching 100 Billion is small considering it's only based on the current monetization scheme of advertising (you would also have to argue at the same time that more efficient monetization ideas exist).

tl;dr- It could be unwise to measure new age technology companies with old age metrics when discerning value

Obviously, there are some outliers like Groupon that do create large valuations with little value (arguably)

I'd agree the P/E isn't the be all and end all of company valuations and I think you make valid points.

I think whats more odd is that the article's argument starts out with something that I see as more of a straw man argument. I think if you're going to throw P/Es into the tech bubble discussion, you have to at least address the very high P/Es of the notable SV IPOs and why they are justified. I guess the initial point just comes off as somewhat off-point and disingenuous to me, whether its a bubble or not.

I feel like I heard this same thing before... just over a decade ago.

Here's the deal, economic value is all about returns on capital.

User value or some other sort of "value" may well fit with what you're arguing, but fundamentally, economic value is all about return on investment. That means how much is my investment growing? Growth, therefore, must be measured in real dollars. If it's not able to be converted into a liquid asset, it's not real, it's speculative. So, until such time as you can actually, demonstrably monetize the "value" you're asserting exists in a company like Pandora, is, in fact, speculation and nothing more.

Bubbles are driven by speculation en masse. Some people get rich in them (because they sell before the crash). Every time there's a bubble, people start talking about how the old rules don't apply. Thus far, every time, they've been wrong... and it's because to increase value, you need to be able to monetize the offering. If not, you're creating user value, but no economic value.

Over anything but short-runs, investors want returns on capital – because you can find them elsewhere... so if your capital is tied up in an investment that isn't actually producing monetizable products, it's not producing capital gains. Therefore, there's a clear opportunity cost associated with putting capital some place that it's not growing in any sort of real (i.e.: liquefiable way within some predictable timeline) – and if the investment stays like that for too long, investors will go elsewhere, for greener pastures.

>"I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth."

In other words...this time it's different!

Sometimes it is, but more often than not, it isn't.

>Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable

That's a circular argument. The whole point is that very question: what is controlling the source of 100 million users worth? Apparently not enough that you can make money off of it at a reasonable scale.

> A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet.

In other words, their inflated valuations are somehow justified by the fact that there is a lot of risk involved?

> "Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable."

Valuable to whom, and to the tune of how many dollars?

I'll agree that some startups have the potential to be worth a lot of revenue down the line - I mean, it is how nearly all startups get off the ground. But this doesn't seem like the case here - Pandora never really saw very much revenue despite dominating the online streaming market. Their valuation was always based on an ephemeral notion of being able to monetize better some undetermined time in the future with their user base.

And then Spotify and Rdio came in... so now Pandora's market share is at risk long before they ever got around to really monetizing their users.

So while your point is theoretically valid, in reality 99% of the time it simply doesn't apply.

Unrealized potential earnings translate into a higher P/E, they do not make the entire concept of P/E invalid.

Your flawed way of thinking is exactly what prevails in a bubble.

I'm not disagreeing with any of you, like I said above, simply playing devil's advocate :)

This confuses me. I believe Zynga has earnings, because in the comments of the OP Fred Wilson estimates their P/E at 13x ("Zynga trades at something like 13x pre-tax cash flow when you back out the $1.5bn of cash they have.") And I know Pandora has earnings, because I pay them $36/year myself.

Revenue != earnings.

Earnings = revenue - expenses

It's super-important to remember the distinction.

Thanks, I understand.

P/Es are a little confusing... earnings by that metric really means net income or earnings per share. In other words their liabilities and costs figure into "earnings".

Fred Wilson is using some wonky math there. Using projected earnings their P/E would be easily be calculated at 100+ and possibly much more. They would really have to do something out of this world to have a P/E in the teens.

http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii

here's the math. it is not wonky.

market cap = ~$6bn, cash = $1.5bn, enterprise value = ~$4.5bn, pre-tax earnings/EBTIDA in Q1 = $87mm, annualized = $358mm, enterprise value/annualized ebitda = ~13

Forbes ran an article recently describing how some social media companies may be deferring revenues of digital purchases by classifying them as "durable goods", which could be seen as a way to make themselves more attractive as an ongoing investment. The Forbes article is quite skeptical. Worth a read:

http://www.forbes.com/forbes/2012/0507/features-social-media...

Your $36/year is revenue, not earnings [1]. Unless I'm misreading the numbers, both P[2] and ZNGA[3] still have yet to report a profit and establish actual ratios for P/E.

[1] http://en.wikipedia.org/wiki/Earnings

[2] http://finance.yahoo.com/q/ks?s=P+Key+Statistics

[3] http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics

I read Fred Wilson's blog on occasion and he seems like a decent human being. But I get a chuckle out of the fact that he's the first to leap into the comments of post like this, discussing the bubble. He's a VC for crying out loud. He benefits from the bubble.

Like I've said before: I'm a reasonably young man, and this is my first go-around having actual money as these various economic cycles occur. I watched the housing bubble closely. And the whole way down the realtor associations were screaming, "There is no bubble! This is the best time to buy!"

I think it's something we all know, but it feels more "real" to me, because I witnessed it. The lesson is, don't listen to the opinions of people whose livelihoods depend on maintaining the run-up. Keep that in mind when you read these blogs, written by techies, with comment sections filled with VCs and and CEO/CFO/CTO's of 1 employee companies waiting for their funding.

i don't benefit from the bubble. it drives up the cost we have to pay to invest in companies. i pray for the day the markets tumble.

True, but the other side of the coin is that investments can exit at much higher value in a bubble environment.

It's not the price that matters, it's the activity level. House-flippers don't complain about the price of the house; returns are relative. You can't honestly tell me that times like this aren't better than, say, 2003?

Now, I don't mean to imply that you, personally, have some sinister intentions to keep the bubble going. But in general, VCs have to speak highly of the industry. Otherwise, how do they explain any investment?

If I'm wrong, and I could be, I'd love to see some examples of tech VCs who are actively calling a bubble. I'll bet there aren't many, and that's no coincidence.

we raised a fund in 2003. i remember it well. it took us a year to raise that fund. nobody wanted to invest in internet startups. that fund will go down in history as one of the best VC funds raised. certainly one of the best of that decade. price matters. environment matters. that was a much better time to invest than now.

That's disingenuous. How have the companies you funded in 2005 been doing? For those that were acquired or IPO'd, the current valuation bubble has benefited you immensely. The amount you invest in new companies pales in comparison to the payout from a company like Groupon. Granted, few investors have a Groupon in their portfolio, but you're still getting paid more than you would without inflated valuations.

we are not investors in groupon. ugh. yuck.

I wasn't suggesting that you were, but rather that the valuation bubble has meant the exits of companies you've invested in have been higher than they otherwise would be. It costs you more to invest now, but that's offset by the increased income from companies you invested in pre-bubble.

Zynga has no earnings? Nasdaq lists them as having a P/E of 39 for 2011. http://www.nasdaq.com/symbol/znga/pe-ratio

Groupon's is -12, however: http://www.nasdaq.com/symbol/grpn/pe-ratio

Where did you read that Zynga has no earnings?

Its probably just best to look at their financials in that there is a lot of interpretation. You can look at GAAP vs. non-GAAP and trailing and forward earnings as well as a number of other things to come to a P/E. In other words they are different depending on who is running the numbers and what metrics they are using.

Probably best to come to your own conclusion... http://investor.zynga.com/releasedetail.cfm?ReleaseID=667869 http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii

You can come to whatever conclusion you like, but the fact is Zynga has earnings. Read Fred Wilson's comments in this thread if you're still confused.

The fact is that under GAAP Zynga has had huge losses the last 2 quarters and under non-GAAP it has earnings. That is according to Zynga itself. For how the market responded to these mixed earnings figures you can look at Zynga's haircut since they announced the figures on the 27th which resulted in a drop of 10%

> and under non-GAAP it has earnings.

Yes, when it ignores arbitrary expenses, which are considered legitimate by GAAP, it turns a profit.

Coincidently, when I ignore expenses incurred by my wife, my income also goes up considerably. Want to invest?

Yeah I agree it is absurd - the discrepency in Zynga's GAAP and non-GAAP earnings over the past few quarters is disconcerting. My only hope is that investors seem to be catching on based upon recent stock moves.

As I see it non-GAAP is fluff just being used to allow VCs to continue to move product at a good enough price.

> You can look at GAAP vs. non-GAAP

non-GAAP is pure crap made up by the company, without any checks or balances.

Such crap went crazy in the first tech bubble. The fact that people are plugging non-GAAP tells you everything you need to know about whether there's another bubble.

zynga has earnings. $87mm of pre-tax cash flow in the first quarter that was just reported. Zynga has had earnings/profits/cash flow for years.

This is also half the story. Under GAAP, net income was -85 million last quarter and the quarter preceding it was -435 million.

> zynga has earnings.

http://finance.yahoo.com/news/zynga-disappoints-again-141528...

"Net loss was $85.0 million in the quarter compared with net income of $65.1 million a year ago."

I assume you realize the point of having Generally Accepted Accounting Principles is that they are generally accepted.

You could maybe create a market for VC-Accepted Accounting Principles (VAAP), but I thought that died in the first tech bubble. Apparently I was wrong.

GAAP is nonsense. cash flow is what matters. i suggest you go look at all of those non cash charges and see if you think they are really expenses of the business.

Wait, why are generally accepted accounting practices nonsense? And, if so, why are they generally accepted? I don't know much about accounting, so this question is in earnest.

they are generally accepted by the accounting profession. but not by investors. investors tend to focus on cash flow. at least the smart ones do.

> but not by investors.

At least, those investors interested in the appearance of a viable company, as opposed to those who are interested in a bona fide profitable company.

> GAAP is nonsense. cash flow is what matters.

Apparently, GAAP cash flow is news to you. Also, the fact that you're not interested in profitability says everything that I need to know about you and your firm.

The problem I have with this is that there's a lot of conflating what "should be" with what is – he talks a lot about "intelligent investors" and "good investors" – but that says nothing about what is (or isn't) actually happening.

It's precisely when bad investments get made quickly, at irrationally exuberant levels that we get bubbles – and the claim is that there is exactly that sort of irrational exuberance going on with many startups/or in VC funding in the tech sector. The only thing that the author offers to refute that specific claim are his own assessments of valuations, but no hard numbers.

Further, he tries to argue that the Instagram purchase is justifiable because it's only 1% of FB's value – but that's just it – that sort of thinking is begging the question (in the old sense of the term) or circular. Based on what I've read, a 100 Billion valuation of FB would put its P/E ratio at around 100 – that's high. Really high.

So, what if it trades closer to a 20 P/E ratio (where many other tech companies are) – that means the Instagram purchase was nearly 5% of FB's worth – for a 13 person startup with no revenue – made only as a defensive play, according to some. To me, that's excessive.

Details aside, the whole point is that you can't use numbers from within the suspected bubble to support the argument that other numbers are rational and thus reflect the lack of a bubble.

Those sorts of short-sighted arguments are on my list of warning signs for a bubble. When we get enough of those, the idea of convergent evidences should lead objective observers to bet on it being a bubble...

Really? I would argue that a bubble is a psychological bug that causes investors to ignore the numbers. They're usually right there in front of you, but the bubble effect short-circuits the rational thought process that tells you not to invest without checking the data.

Now, I will be willing to grant that perhaps we're about to be in a bubble, but now we're venturing into the land of speculation, aren't we? If gathering data to tell us what the markets are going to do were easy, bubbles wouldn't ever begin in the first place, would they?

How, exactly, do you see me as arguing that anything but numeric foolishness is going on here? Investors, in bubbles, frequently find ways to justify the numbers – often with talk of how the old rules don't apply, etc., etc.

In this specific post's case, however, the author fails to see the lack of quality in the numbers which he (barely) uses.

Trusting bad numbers without really digging into them is little different than "ignoring the numbers", as you put it. They're two sides of the same coin – sloppiness because of excitement or other failed thinking.

As for your last argument – I'm not sure what to make of it. On the one hand, just a few lines above you argue that the numbers are usually "right in front" of investors and that bubbles are caused by ignoring them... but then you argue exactly counter to that and say that seeing bubbles isn't easy and that data can't tell you when there's a bubble.

I strongly disagree with that last point – the housing bubble was definitely spotted using data before it burst, as was the last tech bubble. It's just that few wanted to believe that the old fundamentals still applied. But thus far, they always seem to.

When people are willing to grant that perhaps we're about to be in a bubble, we're in a bubble right now.

100 Billion valuation of FB would put its P/E ratio at around 100 – that's high

Here's how I think about Facebook's valuation: I compare to Google. Facebook is the only player that can challenge Google's supremacy. Today, in terms of time spent, they are equal to Google. So at a minimum, they should be worth a quarter of Google's value. Maybe half. Probably not quite as much as Google yet, but close. Guess what. Google is at $200B. So valuing Facebook at $100B looks very reasonable to me. I'd say that at $50B, it would be a steal.

So, you explicitly ignore the P/E ratio in your assessment? Because, if not, here's a graph of Google's P/E ratio (currently 18.64): http://bit.ly/Jk8VAj – compared to FB's projected P/E ration which is predicted to be over 5 times as much.

Facebook bought Instagram with about 1/3 cash and 2/3 stock they also had 50 million cash on hand which inflated the purchase price. Honestly, they probably wanted a premium to cover the risk that FB's is worth less than 100 billion. But, they still got enough cash to make the founders comfortably rich, and the valuation is high enough that the VC's made a killing on paper which keeps them happy.

Good question. I built a site to help us decide:

http://techbubbleforeveryoneorjustme.com/

The tech companies who are actually hiring people (i.e. the antithesis of the two person startup seeking technical co-founder) are selling a product or service for money. The only people worried about a bubble are those who are hoping to cash out on their user count. Ask yourself: "does the work I do contribute to a product or service that can be sold?". If the answer is yes, then you're living outside the bubble.

A bit of an oversimplification, no?

There are plenty of startups of the "lots of users, show ads" variety, some of which might actually make viable businesses, most of which probably won't.

The trouble here is overvaluation - there are plenty of startups which do sell a product or service for money, but are overvalued and over-hired. I can imagine many startups here that would make viable, profitable, 10-person shops, but instead are swimming around with 100+ engineers. The fact that they have revenue and monetizable product isn't going to save them when the bubble bursts.

Indeed, I am generalizing somewhat, but it's a core truth that holds pretty well. Consumers don't really care about a bubble, if they value a product or service they're going to buy it. The bubble won't make a company any less profitable, an over-hired company is still over-hired regardless of whether or not a bubble exists; this applies even to ad-based companies. If the bubble bursts tomorrow, Facebook and Google won't care, it's not as if their ad-clicking users will suddenly stop clicking ads. A bursting bubble is only a threat to those who rely on external cash infusions to bootstrap their operations until they can figure out how to turn a profit. If 10,000 conversions a month is profitable, it will still be profitable when all the VC money dries up.

I think there is a bubble in articles about whether or not there is a tech bubble. I cannot wait for it to burst.

Agreed, enough with the f-ing BS about asking the same question over and over.

Signal/noise ratio has taken a nosedive on HN lately; sad.

Are there any tech investors who say there is a bubble right now? Or do we not get to read about that until after the bubble pops and it becomes status-enhancing to have "known all along" that it was a bubble?

Did you have any facts or logic, or were you hoping that casting VCs as the next subprime mortgage brokers would remove the need to present them?

The evidence is the sub-prime mortgage brokers.

Or do you think that there is some invisible line of morals that separates one kind of person who lends money, from another?

Loaning money that poses no risk to yourself (subprime brokers) is quite different from loaning money you risk losing (VCs).

Morals don't come into it, they are factually different. VCs aren't on selling their risk (thus mitigating it). Are they? (I could misunderstand how VCs operate).

It's a bubble, which is why you've been hearing people hesitantly asking if it's a bubble for 6 weeks.

Of course there's a tech bubble, there will continue to be tech bubbles for a long time.

But, it's not that much of a concern any more for several reasons. First, the core strength at the heart of tech continues to get stronger with many diversified sources of revenue, regardless of the bubble. Second, the bubble isn't all encompassing, only some companies are part of the bubble, not all. Third, there's widespread awareness about these bubbles while they are happening.

The online business sector has matured tremendously in the last decade and a half, it is no longer even a little bit monolithic. The web is now just a platform, and while some online businesses may play in dangerous bubble infested waters, many others do not. We will never again have a situation similar to the original dot-com bubble, with such a huge impact across nearly every online business and such a huge impact on the entire economy.

How about a "social media" bubble?

The best sign that we are not in a bubble is the fact that it's mainstream to think that we are in a bubble. This suggests that the possible overhype is already accounted for in the market price.

It's the equivalent of when your taxi driver starts talking about a "hot stock", it's time to sell.

The best sign that we are not in a bubble is the fact that it's mainstream to think that we are in a bubble. This suggests that the possible overhype is already accounted for in the market price.

No it doesn't, because most of these companies aren't trading on the public markets. They're taking venture capital funding or trading on private exchanges. So it takes VCs believing it's a bubble (which it is against their interests to believe!) to actually factor that into valuations.

It's a bubble. Time to pick who's a real business, and buy their stock when the whole thing crashes.

The debate is caused by the binary term "bubble". Neither answer (yes or no) is correct. A better question might be "how exuberant are we getting?" (anyone around in 1996 wil recognize that term)

This might be relevant:

http://www.quora.com/the_edge/Intriguing-answer-on-Silicon-V...

Apparently housing prices are bottoming out (US domestic) and people are starting to get serious interest in San Francisco property (much more than normal). I remember reading somewhere that rents had a massive run up during the last bubble (where leases killed a bunch of startups - 5 year leases at 2000 prices during the crash).

From: http://news.ycombinator.com/item?id=3850170

Steve Jurvetson (DFJ Venture Capitalist) has this to say on whether or not we may be entering a bubble:

http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-...

Who knows, with the JOBS act passed, and the consequent relaxation in securities regulations we may have sown the seeds of an unpleasant moment in the near future.

Anyway some food for thought.

JOBS Source:

http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...

JOBS Act criticism:

The Consumer Federation of America characterized an earlier version of the legislation as "the dangerous and discredited notion that the way to create jobs is to weaken regulatory protections"

Criminologist William K. Black had said the bill would lead to a "regulatory race to the bottom" and said it was lobbied by Wall Street to weaken the Sarbanes–Oxley Act.

"gutting regulations designed to safeguard investors", legalizing boiler room operations, "reliev[ing] businesses that are preparing to go public from some of the most important auditing regulations that Congress passed after the Enron debacle" and "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital".

I'll probably take a karma hit for this, but I find it neither intellectually stimulating nor effective to talk about whether we're in a bubble, especially if it's fear mongering. If you want to convince smart people they're living in a bubble, do it with data and intellect. This one at least seems like a step in the right direction using specific companies and PE ratios, whereas the previous articles were pretty easy to dismiss with hardly any data to reference (Chris seems to argue against a bubble in this article, I just like that he's using data).

The only thing I can look at and agree with is that seed round valuations are higher. Can a bubble be created based on inflated seed valuations? That'd be a more interesting conversation to have. The A rounds are not trivial to raise--you still need traction, whether it's users or revenue.

If we are in fact in a bubble, what exactly are you going to do? Are you going to immediately start focusing on revenue, knowing that it may be harder to earn in the near future? Are you going to go out and raise your Series A/B/C right now given your 6+ months of runway left? Or are you just going to entertain the conversation? It doesn't feel like a very productive conversation to have unless you're actually acting on it right now.

It's nice to see someone approaching this question with actual data, and not gawking at a handful of acquisitions that are arbitrarily deemed "excessive".

Wait. What? Where's the data? There's a citation of P/E ratios for large tech companies and then the author's assertions about his judgements about seed and A series valuations. That's not really a lot of actual data in my book.

There's always more data you can have. I was merely saying that the author presented enough data to make a credible argument, not that he was correct. His approach, though undebatably imperfect, is much more valuable than the typical "Complain because company x got acquired for too much damn money" approach you see most everywhere else.

though i am at the same ship, with a startup, the problem of his analysis is that he already has a lot of investments waiting for an exit. it would be nice to watch carefully opposite ideas to this, of course, with actual data.

People need to define what they mean by a bubble, most of the companies mentioned are privately held, it's not clear this is like the .com bubble or that a crash would have wide ranging effects - unless someone would like to explain?

Can someone provide some stats on the number of "tech bubble" tweets and blog posts; versus boom and bust economic cycles?

Does the bubble matter? Isn't it more important to be in a safe place when it burst, which means building some reliable now in anticipation?

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