Comment by gjmulhol | Hacker News Reader

Comment by gjmulhol | Hacker News Reader

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So how does this market crash? This is something I have struggled with for some time. Markets have typically crashed because public investors buy at very high prices and then the market loses faith that the future cash flows of the business will pan out. But IPOs aren't happening like they were. Facebook buying Instagram for $! billion is crazy, but Facebook continues to grow and generate revenue (because of or in spite of Instagram) to exceed investor expectations. If these acquiring companies continue to grow and succeed, then how does the bubble collapse? We have no idea whether Nest can justify the $3.2 billion Google paid for it, we just know that Google continues to beat estimates and the Nest guys continue to afford nice cars.

I also do take exception to the fact that MBAs are all vultures. I am trained as a computer Engineer, practiced as a materials scientist, and got an MBA. Now I am one of those exact vultures you speak of with a startup of my own that I, by the way, believe is going to contribute meaningfully to society.

Evan Spiegel's view of everything got leaked with the Sony Hack. Take it for what its worth:

Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets - at these values, however, all tech stocks are expensive - even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won't be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars -- largely due to mobile advertising performance - especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users - a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. "If this company attracts just 5% of users that FB has, it will be HUGE" - fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease - compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.

Do you have a link to this?

http://www.businessinsider.com/snapchat-ceo-evan-spiegels-em...

It was submitted on HN couple of weeks ago, here is the discussion: https://news.ycombinator.com/item?id=8764135

Thanks for this. I am not sure I am quite so gushing, but the analysis seems reasonable. Time to go and short Twitter :)

Interests rates rise, investors pull out of riskier assets, like tech/VC. Funding dries up, businesses start to fail, causing further investor pull back, which in turn causes more businesses to fail.

>If these acquiring companies continue to grow and succeed, then how does the bubble collapse?

Simple: the bubble collapses when the acquiring companies no longer grow and succeed.

Facebook et al are doing well, but also have sky-high valuations. Current investors aren't satisfied with current income, they expect massive growth going forward.

If current investors weren't satisfied with current income, they would sell. Facebook's margins are excellent, and while I will agree their P/E ratio is high, Google's is quite near that of GE (which should have a much lower multiple considering their return on assets is MUCH lower). I'm sure it will happen eventually, but tech companies are making money right now, and they aren't built on broken economics like the dot com bust in 99.

I guess while I agree there is a bubble in startup valuations, I do not think Google, FB, and friends are at huge risk of going bankrupt or losing a substantial portion of their enterprise values.

If current investors weren't satisfied with current income, they would sell.

The market is not about current, but about the future. Stockholders are banking on FB figuring out how to monetize all the users.

I do agree with you that companies today are mostly all making money which is very different from the 90s. Whether companies like FB can maintain growth to sustain their valuations is something that remains to be seen.

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