Bubble talk and high valuations comes up every month or so. pud's comment sums it up nicely:
Generally, being profitable precludes a company from getting "silly [high] valuations" & buzz in Silicon Valley. Unless they're really, really profitable.
Big valuations usually stem from not knowing how much a company will make once they start charging for stuff. So the "it" crowd works itself into a frenzy and VCs take a big gamble.
But once you make a dollar, all the mystery is gone. You're judged & valued pretty much on your revenue alone. Which is usually low (startups are hard) and unsexy (so not a ton of buzz).
The most interesting thing, to me, about the current valuations, is where they're going to be in another 6 or 12 months of this momentum. Yellen is highly likely to maintain the negative interest rate environment for years to come, and that should encourage a stock market move even higher.
Motivated bull markets never stop at a bit above historical average values. They go a lot higher, become quite irrational, and then crash. As it is already, about 85% of the gains in the market over the last two years have been pure PE expansion, as earnings growth has tumbled to low single digits.
I expect valuations for tech companies across the board to get significantly frothier before the music stops again. If a company like Snapchat is worth $3.x billion today, I see no reason to think capital won't bid it up to $5 or $10 billion over the coming year, assuming the very accommodating environment continues.
It will continue to go up as long as there are people who are afraid and have not put their money in. As soon as it is obvious the market will go up forever, then it will drop since there is no more new money coming in.
Especially when most of these articles don't even talk about these companies price to earnings ratios. If you really wanted to know if there was a bubble, this would be the FIRST thing you look at.
This was the Achilles heel for the original dot com bust in 2001.
"Some people worry that the looser rules may end up hurting small investors."
LOL bagholders will always find a way to set themselves up as bagholders, all you can do is shove them in or out of certain markets. When you look around the poker table and can't figure out who the sucker is, and you're only at the poker table because its trendy and cool to play poker right now, guess who the sucker is?
Just like real estate always goes up (until it doesn't) tech IPOs / valuations only go up, so by greater fool theory you should put all your money into whatever is going up because you can always sell to a greater fool at a profit (until you can't)
If you use EPA/OSHA/NAFTA/whatever to eliminate all other resource extraction industries, you end up with a bunch of sharks extracting resources (money) from dumb investors. The same folks who would be selling the golden gate bridge to multiple people are stuck selling tech IPOs at this time.
Definitely a good point. Cisco was worth not quite $600 billion at the peak of the dotcom bubble. They lost about 93% of their value in the meltdown, but that didn't mean routers were going away.
The same is no doubt true about mobile software and social networks. I personally don't think Snapchat is worth $100 million, much less the $5 or $10 billion valuation they may eventually command from a VC round before the party is over. I don't think they can monetize the product, or convince a major player to spend that kind of cash. They're stuck in a tumblr-like quandary, but it's even worse, because their valuation removes a lot of potential buyers. That being said, clearly there are going to be a lot of winners in the mobile software market, regardless of Snapchat's individual future.
To me, the obvious sign of the bubble isn't the high valuations, but the asphyxiating red tide of MBA-culture people who are in technology for all the wrong reasons.
They're an invasive species. They come in during bubble times, compete successfully for attention and funding, because they have superior social polish (and, more importantly, can exploit the "just like me" bias of chickenhawking VCs) to the real technologists, build a self-referential junk-pile of nothing, and then leave just before the silly bubble-world they've created collapses.
Then real technologists get a few years of relative calm and meritocracy (although there's not nearly as much money in it, then) before the cycle repeats.
Technology is incredibly rewarding and I wouldn't want to be in any other career, but it's hard and you gotta be real to get any good at it. It takes years of realness-- hard work (often unrecognized) that kicks your mental ass-- just to get the basics. When people who aren't real try to come in and get the rewards-- Harvard MBA CEOs who don't even understand linear algebra setting themselves up as "data whizzes" because they were able to hire smart people-- it's irksome.
This. Along with the banks / bankers that start drooling over the crumbs they can pick up and 'making deals happen.' These parasites mostly only show up when the money is flowing in a big way, and they start pushing everything higher and attempting to generate absurd mega deals (eg AOL + Time Warner; HP + Compaq; Nortel + Bay Networks; Microsoft + WebTV; Yahoo + Geocites & Broadcast.com; endless others).
How do you define "real technologists" and how do they handle all of the other aspects (marketing, sales, operations) better than "MBA-culture"? Your statements as a whole seem to take a very narrow view that technology companies are purely a meritocratic enterprise based solely on the quality of technological contribution (however one can judge that). This has never and will never be the case.
Technologists are just as apt to build steaming heaps of bad technology for technology's sake and contribute just as much to the bubble as everyone else. I think the MBA hate is a meme that manages to perpetuate as an easy scapegoat for people making bad decisions, regardless of background.
"This year, shares of newly public technology companies are being valued at 5.6 times sales, estimates University of Florida professor Jay Ritter, who tracks IPOs. That is well short of the median of 26.5 times sales in 1999."
At least the WSJ feels obliged to put facts in their articles, even if they contradict the headlines.
Except that's not what they did. They looked at what's probably the most meaningful ratio, and they found that it's not merely lower but around 5x lower.
(This sort of comment is a good illustration of a problem with forums, incidentally. Once a forum has users who reply by mischaracterizing what you say, every comment is twice as much work. First you say what you want to, and then you have to make another comment saying in effect "no, what I said was...")
> They looked at what's probably the most meaningful ratio...
Says who? While price-to-sales can be a very useful metric, I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued.
And using the median value of this ratio at IPO alone with a small subset of companies in an effort to argue for or against the notion that there's a "bubble"? That's simply not credible.
For what it's worth, if you do want to look at price-to-sales, and in a more meaningful context, it's worth considering that the median price/sales ratio in the US markets is at a record high and exceeds the mean by a near record margin as well[1].
"I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued."
Despite the fact that the most knowledgeable people in finance and business management widely agree that the most rapid growth cannot take place in a company also turning out maximum profit, HN participants still continually demand profit be the most important metric.
Profit is not the most important metric, and never will be for growth companies. In fact, if you use profit ratios as your metric for growth companies, you will be wrong 100% of the time. Not just sometimes, 100% of the time.
Price/Sales is a great ratio to use and in most cases probably is the most meaningful ratio.
Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. That US Price/Sales ratio you quoted also includes highly profitable, but non-growth companies like utilities and other old businesses.
Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
> HN participants still continually demand profit be the most important metric.
That may or may not be true, but nothing in my comment suggested this was the case. In fact, if you argued that the price-to-earnings ratio was the most meaningful metric for investment and trading decisions, my response would be the same: it can be very useful, but alone it can get you into a lot of trouble. Nobody experienced is investing/trading off of a P/E comparison that takes a fraction of a minute.
> Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing.
Trying to understand a subsection of the market without understanding the broader market is a recipe for disaster. This is especially true in today's market.
For clarity:
1. There are companies that deserve premium valuations. Some of these are tech companies.
2. The Fed is driving the market today, so valuation is very, very difficult.
3. Folks who believe there are publicly-traded companies that haven't been impacted by QE and that aren't vulnerable to major moves in either direction based on changes in monetary policy are going to be hammered.
> Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
I don't completely ignore fundamentals but I trade primarily off technicals so I'm afraid I'm not going to impress you. That said, I would offer the observation that anyone who looks at trendlines has probably made a lot more money with far less effort over the past several years than folks who are obsessed with fundamentals.
"I don't completely ignore fundamentals but I trade primarily off technicals so I'm afraid I'm not going to impress you. That said, I would offer the observation that anyone who looks at trendlines has probably made a lot more money with far less effort over the past several years than folks who are obsessed with fundamentals."
Technical analysis has been repeatedly proven to not be a valid investment strategy over long periods of time. Even still, your statement is true since technical analysis requires no effort and the market has moved up dramatically, but you could also say the same thing about picking random stocks using a randomizer. Its easy to feel like a hero in this market.
If you don't understand fundamental analysis, why would you comment so forcefully about fundamental analysis?
[Edit] I just realized I am backing up PG, he needs no backing, he has the most successful incubator in the history of tech investing. Maybe it is worth considering what he says before assuming a ratio you haven't spent much time thinking about is not that important.
> Technical analysis has been repeatedly proven to not be a valid investment strategy over long periods of time. Even still, your statement is true since technical analysis requires no effort...
Technical analysis is not an investment "strategy." It is a technique that many market participants use to varying degrees. You're free to dismiss it, as many critics do. Regardless of whether you use fundamental analysis or technical analysis, profitable investing/trading requires a lot of other things (money management, discipline, etc.).
I will say this in response to your "hero" comment: I personally don't know a technical analyst who was long US equities in late 2007 as long-term trendlines were breaking. And you can probably do the math on what short positions produced in 2008. On the other hand, for example, there are very smart folks sitting underwater on AAPL stock they bought in the $600 to $700 range who are arguing that the company is undervalued according to fundamentals. Maybe they're right, but they're not making money and they're currently paying a very high opportunity cost.
In short, in my experience, technical analysis in its most basic form keeps investors/traders on the right side of the trend, and enables them to more easily identify when the trend has changed. That right there is more than half the battle.
> If you don't understand fundamental analysis, why would you comment so forcefully about fundamental analysis?
There's a difference between not understanding something and not relying on it. I never said that I didn't understand fundamental analysis. I argued that comparing the price-to-sales ratio at IPO of a small number of companies today to the price-to-sales ratio at IPO of a larger number of companies in 1999 is not a valid methodology for proving or disproving the existence of a bubble.
> ...he has the most successful incubator in the history of tech investing. Maybe it is worth considering what he says before assuming a ratio you haven't spent much time thinking about is not that important.
I respect Paul Graham and what he has done with YCombinator. And I've pointed out in the past that YCombinator is far more insulated from the "bubble" than others because it invests very small amounts of money in lots of companies at their formation. As such, YCombinator is nowhere near as exposed to valuation inflation as other investors.
None of this means that everything PG says should be accepted without question. Appeal to authority arguments might sound convincing, but they're probably not going to make you money. If your own due diligence suggests that you should invest/trade primarily off of price-to-sales, I wish you the best.
How exactly does that contradict the headlines:
"Silicon Valley: Feel the Froth: Tech Valuations Stir Memories of 1999, but There Are Some Differences"?
I guess if the indicator they are suggesting they are using is at 1/5 of the bubble, that means it stirs memories? "Tech Valuations Stir Memories of 1999, but There Are Some Differences" is actually the subtitle, not the headline.
Twitter: 15? ($650m in expected sales or whatever, $10b assumed valuation)
So is there a bubble in a certain class of tech companies? I think frothy is the right word for now. The valuations are clearly very high, but not 1999 high. Right now it reminds me a lot more of 2005 > 2007.
I do appreciate that they're using the term froth instead of "bubble". But froth just seems to be a new term for "the IPO cycle is starting up."
There is an IPO cycle. Big proven companies go public (Facebook, twitter), then smaller less proven companies go public (next year), then (on the appetite for ipo returns) junk starts going public and then the junk crashes and investors sour on IPOs for five to ten years before another big proven company starts the cycle again.
This exact phenomenon was discussed in Benjamin Graham's "intelligent investor" from the 1940s.
Sophisticated VCs I know talk about this as IPO windows, and openly discuss whether a company can make it public in this window or will have to wait for the next.
IMO the sample is skewed by the fact that companies nowadays only rarely go to IPO.
In the 90s even the shitty companies went to IPO. Their shittiness inflated the PE figures.
Nowadays shitty companies don't go to IPO. They fail silently, bought out by some other company or just shuttered without warning. The easiest exit now is to sell to one of Facebook, Google, Microsoft or Apple. Retail investors don't get burnt, so almost nobody in the mass media cares. Professional investors generally don't advertise their cockups, so life goes on in blissful ignorance.
Because these companies don't go to IPO, there's no public data on their performance.
So in fact the current bubble could be as bad, or indeed worse, and there's no way to tell because the data point being used (PE for post-IPO companies) is not based on comparable samples.
I think that the data on the SF housing market might be a better indicator of how much money is chasing tech right now, since that's a major sink for it.
Shitty companies not going public, shitty companies failing silently, retail investors not getting burned, professional investors in high risk ventures taking the big losses.
I would be interested in seeing the list of tech companies this stat is based off of. 5.6 seems really low to me seeing that FB, zynga, linkedin are all valued at hundreds of times sales.
Guessing these tech companies are not consumer software companies, but maybe hardware / manufacturing companies or something
I posted a few examples above (Facebook has a 20), but Zynga actually isn't a good reference for a high number. It has a trailing four quarters sales to valuation ratio of 3 ($1b in sales, $3b in market cap). And despite Zynga's significant problems, they're sitting on $1.1b in cash stacked against that market value. If they're careful they can probably lose money for a decade and stick around.
Other surprisingly low examples: Groupon (3), and Angie's List (their stock crashed recently, but it's now a 4).
Valuations on AngelList certainly seem to be creeping relentlessly higher for Valley companies.
The typical pattern seems to be the following:
- first a seed round of $500k with a convertible note
- next a valued equity round of $1m at a premoney valuation of $6m
The general impression I get from this is that valuation has become divorced from reality. What seems to be driving it is that the founder/s just don't want to give up more than 25% of the equity for around $1.5m funding. In that sense they're kind of pulling numbers out of their nether regions to make the math work out.
"Froth" as in lots of bubbles? One little bubble collapsing wouldn't necessarily blow out the rest, unlike a singular bubble.
Or "Froth" as in "frothing at the mouth" (from insanity and/or rabies)? Given the silliness, this is equally applicable.
From having worked on a trading system in the late 80s, I know that investors (and traders) at the retail level work at a gut level and would see market moves very shortly after news items would tick across on the Reuters feed. I would argue that this article is intended to be like spraying valium into the zeitgeist for the inevitable collapse. If they can grab mindshare with this "foam" concept, they may very well be able to isolate failed IPOs to companies (without real profit) in limited segments.
Well if not an IT bubble, surely there's a housing bubble. "Home prices in San Francisco and surrounding counties rose more than 15% in the past year".
That's the kind of increase we saw year after year just a year or two before the bubble popped, and prices fell by 50% or so (around 2005-2006 I guess).
It's funny how the majority just assume prices will keep on climbing (I was one of those merry fools by the way), and in hindsight it becomes so obvious that such increases are not sustainable.
> That's the kind of increase we saw year after year just a year or two before the bubble popped, and prices fell by 50% or so (around 2005-2006 I guess).
IIRC, while prices in many parts of the state fell by that much or more, prices in San Francisco did not (and the much smaller amount they did fall in SF was much later than the general bubble collapse, around 2008-2009, as a result of the general economic slowdown caused by, among other things, the collapse of the real estate bubble nationally, not because there actually was a bubble in SF particularly -- SF prices were pretty flat, IIRC, 2005-2008.)
52 comments
[ 12.4 ms ] story [ 1770 ms ] threadGenerally, being profitable precludes a company from getting "silly [high] valuations" & buzz in Silicon Valley. Unless they're really, really profitable.
Big valuations usually stem from not knowing how much a company will make once they start charging for stuff. So the "it" crowd works itself into a frenzy and VCs take a big gamble.
But once you make a dollar, all the mystery is gone. You're judged & valued pretty much on your revenue alone. Which is usually low (startups are hard) and unsexy (so not a ton of buzz).
Not saying a agree with it. But that's how it is.
https://news.ycombinator.com/item?id=5236239
Motivated bull markets never stop at a bit above historical average values. They go a lot higher, become quite irrational, and then crash. As it is already, about 85% of the gains in the market over the last two years have been pure PE expansion, as earnings growth has tumbled to low single digits.
I expect valuations for tech companies across the board to get significantly frothier before the music stops again. If a company like Snapchat is worth $3.x billion today, I see no reason to think capital won't bid it up to $5 or $10 billion over the coming year, assuming the very accommodating environment continues.
People say that a bull market can't be stop until the last bear has been shot. (Then again, who are these "people" that keep saying things?)
"The stock market climbs a wall of worry"
http://www.investopedia.com/terms/w/wallofworry.asp
It will continue to go up as long as there are people who are afraid and have not put their money in. As soon as it is obvious the market will go up forever, then it will drop since there is no more new money coming in.
"We've reached a permanent plateau".
etc
Especially when most of these articles don't even talk about these companies price to earnings ratios. If you really wanted to know if there was a bubble, this would be the FIRST thing you look at.
This was the Achilles heel for the original dot com bust in 2001.
LOL bagholders will always find a way to set themselves up as bagholders, all you can do is shove them in or out of certain markets. When you look around the poker table and can't figure out who the sucker is, and you're only at the poker table because its trendy and cool to play poker right now, guess who the sucker is?
Just like real estate always goes up (until it doesn't) tech IPOs / valuations only go up, so by greater fool theory you should put all your money into whatever is going up because you can always sell to a greater fool at a profit (until you can't)
If you use EPA/OSHA/NAFTA/whatever to eliminate all other resource extraction industries, you end up with a bunch of sharks extracting resources (money) from dumb investors. The same folks who would be selling the golden gate bridge to multiple people are stuck selling tech IPOs at this time.
The same is no doubt true about mobile software and social networks. I personally don't think Snapchat is worth $100 million, much less the $5 or $10 billion valuation they may eventually command from a VC round before the party is over. I don't think they can monetize the product, or convince a major player to spend that kind of cash. They're stuck in a tumblr-like quandary, but it's even worse, because their valuation removes a lot of potential buyers. That being said, clearly there are going to be a lot of winners in the mobile software market, regardless of Snapchat's individual future.
They're an invasive species. They come in during bubble times, compete successfully for attention and funding, because they have superior social polish (and, more importantly, can exploit the "just like me" bias of chickenhawking VCs) to the real technologists, build a self-referential junk-pile of nothing, and then leave just before the silly bubble-world they've created collapses.
Then real technologists get a few years of relative calm and meritocracy (although there's not nearly as much money in it, then) before the cycle repeats.
Technology is incredibly rewarding and I wouldn't want to be in any other career, but it's hard and you gotta be real to get any good at it. It takes years of realness-- hard work (often unrecognized) that kicks your mental ass-- just to get the basics. When people who aren't real try to come in and get the rewards-- Harvard MBA CEOs who don't even understand linear algebra setting themselves up as "data whizzes" because they were able to hire smart people-- it's irksome.
I've noticed they tend to ingrain themselves into startup news and blogs or similar things.
I know some MBA's that run some startup news site in Stockholm/Sweden as well as their own startup. Really disgusting personality.
Really fits into the mild of "superior social polish and exploitation".
Or is that unrelated, and it's just that these particular guys are not very nice?
Technologists are just as apt to build steaming heaps of bad technology for technology's sake and contribute just as much to the bubble as everyone else. I think the MBA hate is a meme that manages to perpetuate as an easy scapegoat for people making bad decisions, regardless of background.
http://online.wsj.com/news/articles/SB1000142405270230447050...
At least the WSJ feels obliged to put facts in their articles, even if they contradict the headlines.
2. Compare today's median value at IPO to median value at IPO in 1999.
3. If today's median value is less than 1999's median value, there cannot be a bubble.
Interesting approach, but one that I would inevitably expect to create more pain than profit.
(This sort of comment is a good illustration of a problem with forums, incidentally. Once a forum has users who reply by mischaracterizing what you say, every comment is twice as much work. First you say what you want to, and then you have to make another comment saying in effect "no, what I said was...")
Says who? While price-to-sales can be a very useful metric, I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued.
And using the median value of this ratio at IPO alone with a small subset of companies in an effort to argue for or against the notion that there's a "bubble"? That's simply not credible.
For what it's worth, if you do want to look at price-to-sales, and in a more meaningful context, it's worth considering that the median price/sales ratio in the US markets is at a record high and exceeds the mean by a near record margin as well[1].
[1] http://www.zerohedge.com/sites/default/files/images/user5/im...
Despite the fact that the most knowledgeable people in finance and business management widely agree that the most rapid growth cannot take place in a company also turning out maximum profit, HN participants still continually demand profit be the most important metric.
Profit is not the most important metric, and never will be for growth companies. In fact, if you use profit ratios as your metric for growth companies, you will be wrong 100% of the time. Not just sometimes, 100% of the time.
Price/Sales is a great ratio to use and in most cases probably is the most meaningful ratio.
Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. That US Price/Sales ratio you quoted also includes highly profitable, but non-growth companies like utilities and other old businesses.
Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
That may or may not be true, but nothing in my comment suggested this was the case. In fact, if you argued that the price-to-earnings ratio was the most meaningful metric for investment and trading decisions, my response would be the same: it can be very useful, but alone it can get you into a lot of trouble. Nobody experienced is investing/trading off of a P/E comparison that takes a fraction of a minute.
> Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing.
Trying to understand a subsection of the market without understanding the broader market is a recipe for disaster. This is especially true in today's market.
For clarity:
1. There are companies that deserve premium valuations. Some of these are tech companies.
2. The Fed is driving the market today, so valuation is very, very difficult.
3. Folks who believe there are publicly-traded companies that haven't been impacted by QE and that aren't vulnerable to major moves in either direction based on changes in monetary policy are going to be hammered.
> Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
I don't completely ignore fundamentals but I trade primarily off technicals so I'm afraid I'm not going to impress you. That said, I would offer the observation that anyone who looks at trendlines has probably made a lot more money with far less effort over the past several years than folks who are obsessed with fundamentals.
Technical analysis has been repeatedly proven to not be a valid investment strategy over long periods of time. Even still, your statement is true since technical analysis requires no effort and the market has moved up dramatically, but you could also say the same thing about picking random stocks using a randomizer. Its easy to feel like a hero in this market.
If you don't understand fundamental analysis, why would you comment so forcefully about fundamental analysis?
[Edit] I just realized I am backing up PG, he needs no backing, he has the most successful incubator in the history of tech investing. Maybe it is worth considering what he says before assuming a ratio you haven't spent much time thinking about is not that important.
Technical analysis is not an investment "strategy." It is a technique that many market participants use to varying degrees. You're free to dismiss it, as many critics do. Regardless of whether you use fundamental analysis or technical analysis, profitable investing/trading requires a lot of other things (money management, discipline, etc.).
I will say this in response to your "hero" comment: I personally don't know a technical analyst who was long US equities in late 2007 as long-term trendlines were breaking. And you can probably do the math on what short positions produced in 2008. On the other hand, for example, there are very smart folks sitting underwater on AAPL stock they bought in the $600 to $700 range who are arguing that the company is undervalued according to fundamentals. Maybe they're right, but they're not making money and they're currently paying a very high opportunity cost.
In short, in my experience, technical analysis in its most basic form keeps investors/traders on the right side of the trend, and enables them to more easily identify when the trend has changed. That right there is more than half the battle.
> If you don't understand fundamental analysis, why would you comment so forcefully about fundamental analysis?
There's a difference between not understanding something and not relying on it. I never said that I didn't understand fundamental analysis. I argued that comparing the price-to-sales ratio at IPO of a small number of companies today to the price-to-sales ratio at IPO of a larger number of companies in 1999 is not a valid methodology for proving or disproving the existence of a bubble.
> ...he has the most successful incubator in the history of tech investing. Maybe it is worth considering what he says before assuming a ratio you haven't spent much time thinking about is not that important.
I respect Paul Graham and what he has done with YCombinator. And I've pointed out in the past that YCombinator is far more insulated from the "bubble" than others because it invests very small amounts of money in lots of companies at their formation. As such, YCombinator is nowhere near as exposed to valuation inflation as other investors.
None of this means that everything PG says should be accepted without question. Appeal to authority arguments might sound convincing, but they're probably not going to make you money. If your own due diligence suggests that you should invest/trade primarily off of price-to-sales, I wish you the best.
For example, P&G is currently trading at about 3 times revenue.
Facebook: 20 | Workday: 40 | LinkedIn: 27 | Yelp: 30 | Pandora: 9 | RetailMeNot: 12 | Salesforce: 10 | Splunk: 25 | Rocket Fuel: 15 | HomeAway: 8 | Baidu: 15 | Priceline: 10 | Sina.com: 10 | Youku: 11
Twitter: 15? ($650m in expected sales or whatever, $10b assumed valuation)
So is there a bubble in a certain class of tech companies? I think frothy is the right word for now. The valuations are clearly very high, but not 1999 high. Right now it reminds me a lot more of 2005 > 2007.
There is an IPO cycle. Big proven companies go public (Facebook, twitter), then smaller less proven companies go public (next year), then (on the appetite for ipo returns) junk starts going public and then the junk crashes and investors sour on IPOs for five to ten years before another big proven company starts the cycle again.
This exact phenomenon was discussed in Benjamin Graham's "intelligent investor" from the 1940s.
Sophisticated VCs I know talk about this as IPO windows, and openly discuss whether a company can make it public in this window or will have to wait for the next.
In the 90s even the shitty companies went to IPO. Their shittiness inflated the PE figures.
Nowadays shitty companies don't go to IPO. They fail silently, bought out by some other company or just shuttered without warning. The easiest exit now is to sell to one of Facebook, Google, Microsoft or Apple. Retail investors don't get burnt, so almost nobody in the mass media cares. Professional investors generally don't advertise their cockups, so life goes on in blissful ignorance.
Because these companies don't go to IPO, there's no public data on their performance.
So in fact the current bubble could be as bad, or indeed worse, and there's no way to tell because the data point being used (PE for post-IPO companies) is not based on comparable samples.
I think that the data on the SF housing market might be a better indicator of how much money is chasing tech right now, since that's a major sink for it.
Shitty companies not going public, shitty companies failing silently, retail investors not getting burned, professional investors in high risk ventures taking the big losses.
Guessing these tech companies are not consumer software companies, but maybe hardware / manufacturing companies or something
Other surprisingly low examples: Groupon (3), and Angie's List (their stock crashed recently, but it's now a 4).
The typical pattern seems to be the following:
- first a seed round of $500k with a convertible note
- next a valued equity round of $1m at a premoney valuation of $6m
The general impression I get from this is that valuation has become divorced from reality. What seems to be driving it is that the founder/s just don't want to give up more than 25% of the equity for around $1.5m funding. In that sense they're kind of pulling numbers out of their nether regions to make the math work out.
Or "Froth" as in "frothing at the mouth" (from insanity and/or rabies)? Given the silliness, this is equally applicable.
From having worked on a trading system in the late 80s, I know that investors (and traders) at the retail level work at a gut level and would see market moves very shortly after news items would tick across on the Reuters feed. I would argue that this article is intended to be like spraying valium into the zeitgeist for the inevitable collapse. If they can grab mindshare with this "foam" concept, they may very well be able to isolate failed IPOs to companies (without real profit) in limited segments.
That's the kind of increase we saw year after year just a year or two before the bubble popped, and prices fell by 50% or so (around 2005-2006 I guess).
It's funny how the majority just assume prices will keep on climbing (I was one of those merry fools by the way), and in hindsight it becomes so obvious that such increases are not sustainable.
IIRC, while prices in many parts of the state fell by that much or more, prices in San Francisco did not (and the much smaller amount they did fall in SF was much later than the general bubble collapse, around 2008-2009, as a result of the general economic slowdown caused by, among other things, the collapse of the real estate bubble nationally, not because there actually was a bubble in SF particularly -- SF prices were pretty flat, IIRC, 2005-2008.)