I really have a hard time understanding these arguments.
There are some good examples out there of difficult-to-understand buys and misunderstood valuations- there's no way the WhatsApp purchase is ever going to recoup its costs(the userbase is irrelevant, at a $1 per year price it just isn't gonna happen, especially considering the WhatsApp founders claimed they weren't going to be charging any more than that or for many other services they wanted to provide, AND that they wouldn't have ads), King.com is just this year's Zynga(news to the tech investment scene: The games industry is not nearly as simple as you seem to think it is), and there's no shortage of questionable investments in smaller companies, to be sure.
But then, you use examples like Airbnb and Oculus as an example of tech industry madness?
"Airbnb is like a hotel chain without the hotels." Yeah. That means they absolve themselves of costs, growth time, investment into that growth, location issues, the works. They hacked the concept of a hotel, and found the holy grail for that market space. Frankly, if you think $10 billion is a ridiculous number, with them being worth more than Hyatt- I'd be inclined to wonder what holds them back being worth 3 Hyatts. They've got momentum, they've got product, and they've got the community. Short of the possibility of some grand competitor actually coming in and doing a bangup job, I think Airbnb's potential is at least an order of magnitude higher than this.
And Oculus- so they have little revenue now? They have decent revenue at all for a product that has only been released to developers. You even admit that VR can completely change the world, but don't do the homework to understand they're probably less than 2 years from a product release with massive community and business support? What, did your deadline come up and you just had to submit?
Look, it's fine if you think either are overvalued. But trying to use either in your examples for how we're in a 1999-style bubble is laughable. You hand us two of the best reasons we're not in a bubble and wonder why everyone thinks we're not. Really now?
I have about a 50% success rate with AirBnB when using it. At a hotel I know what to expect and those expectations are met probably 90% of the time. I'm not going to enter a room at the Hyatt and have my eyes start watering because it smells so strongly of cat piss (actually happened). How can people argue that AirBnB is anything but pretty CSS and some tech. efficiencies on top of HomeAway/VRBO? It may be a substitute for a hotel, but it is not Hyatt.
You also forgot to bring up all the regulatory hurdles AirBnB faces in a multitude of cities, counties, states, and countries. I really don't understand how investors are not calculating that into the risk and valuation (maybe they are).
You're comparing apples with oranges. Airbnb's success is thanks to people like me who can't afford the comfortable certainty of checking into a Hyatt every time I stay abroad. Airbnb's success rate and level of amenities compared to hotels of a similar price range is nothing short of incredible. I couldn't have done half the travelling I have without it.
Without even talking about Hyatt, AirBnB is not that much cheaper than most hotel chains in big cities. If it were like 50% of the price, yeah, why not, but usually it's about the same in the places where I go, so it does not make sense to play Russian roulette with them.
Airbnb can be cheaper if you don't mind sharing a bathroom and all other common areas, which is usually what people are comparing. That's somewhere between a hostel and a hotel, though.
If you want the same privacy you'd have in a hotel room, it will be about the same price if you're looking at a place in Manhattan and comparing it to one of the less expensive boutique hotels. Not to mention the fact that every single 'whole apartment' listing on AirBnb in NYC that doesn't have a proper license is operating illegally.
Honestly, I've been consistently let down by hotels, and so far only incredibly impressed with AirBnB. They've consistently cost me only 80-90% the local hotel rate, for twice the space, in-general-nicer accommodations, and a couple times it even included homecooked meals that were nothing short of unbelievable, just 'cause the owner was still staying there.
I also have a hard time believing that the cat urine thing happened- and that if it did, that you didn't report them to AirBnB. That sounds to me like the kind of thing they'd refund you(or more) for.
If staying in the home of interesting strangers is part of what appeals to you about traveling, Couchsurfing lets you do it while paying 0% of local hotel rates.
I have more mixed experiences. The space is indeed usually bigger than a hotel. Whether it's cleaner and nicer is mixed. I would say housekeeping is not as consistent as a good hotel chain, though it is not usually too bad. Non-sleeping amenities are usually a bit better (good chance of some couches, decent kitchen, etc.), while bed is usually a bit worse. However the part that is really more of a hassle (in my fairly limited experience, again) is check-in and check-out: you really have to be much more diligent about exchanging phone numbers, arranging meet-up times, and double-checking everything, to avoid showing up at a location where there's nobody waiting for you. Whereas with a hotel you can just show up and there's a front desk.
I don't care so much about having a good experience, but I like the near-guarantee of an acceptable experience. I can't think of the last time I had a hotel stay that was below acceptable. I vaguely recall having to switch rooms once over an HVAC issue they couldn't solve. The total inconvenience to me there was well under an hour and that's probably been 10 years (and a corresponding 200 nights in hotels).
Do you find a hotel room unacceptable in some way significantly more than 10% of the time?
> [AirBnB] absolve themselves of costs, growth time, investment into that growth, location issues, the works
That makes them much more easy to replace with a competitor, which is a mark of other bubble-like companies with explosive growth but debatable long-term solid value.
It's surprisingly hard to displace companies with significant network effects even if they have no technology to speak of, pay little attention to the market or users, or really do anything else except exist with a large market share. See: eBay, Craigslist. Closer to AirBnB's niche (since I see AirBnB as essentially "Couchsurfing for money"), Couchsurfing has also persisted despite taking the initial community organization private, which resulted in much of its initial active community leaving, and not really improving the site much since then... because it's Couchsurfing, the site identified with a verb that refers to a particular kind of travel. (Large parts of the initial community founded BeWelcome, fwiw, which is a less-successful fork, though it has moderate traction.)
It's possible to lose a big lead (see: MySpace), but a company that is popularly identified with a particular niche can coast for a really long time without doing much to deserve it.
AirBnb won't be replaced, it'll be made illegal. It's exploiting - in a significant way - something which was already illegal in a lot of places, or certainly skirting neighborhood ettiquette (i.e. not illegal, but do it enough and there'd be good reasons to make it so).
It runs the very serious risk that there'll be crackdowns in popular cities on AirBnb style subletting, and once that happens their income base is only going to go into decline from then on out.
Some of it is, yes. It's combining a number of markets, though. The most problematic is people who are basically running classic, 1920s-flophouse-style, unlicensed and uninspected hotels in places like NYC. I would guess those will eventually be cracked down on. But there are two other big categories. The second is the "couchsurfing for money", people who really are renting out a spare couch or spare bedroom. These are also often illegal, but at least if they do it less often than "always", and fairly discreetly, are much less likely to run into trouble than the person running a full-fledged flophouse operation. The third category are people running fully licensed vacation rentals. AirBnB has somewhat accidentally captured a good portion of this market as well, in large part because its competitors in much of the world range from poor to "don't have an English website" to nonexistent. I rented a house in Crete in this category last year; it was a place that otherwise you could rent directly or via a travel agency, but I only found it via AirBnB because their internet presence apart from AirBnB was poor. I think even in the U.S., which has VRBO as the incumbent, AirBnB is picking up some of this business.
Whole apartment rentals of less than 30 days are already illegal here in NYC unless you have the proper licensing. I think only around 1% of the Airbnb whole apartment listings have said licensing. So everything else on there is an illegal temporary sublet. Note that I do have a friend who operates on Airbnb in NYC and has the proper licensing.
But a competitor would have to add something else on top of it to get over the existing brand awareness of AirBnB. Everyone knows AirBnB and it's hard to shake up the incumbents without something innovative.
> "Airbnb is like a hotel chain without the hotels." Yeah. That means they absolve themselves of costs, growth time, investment into that growth, location issues, the works.
This is brought up a lot in discussions of AirBnB's value, but overlooks several important facts:
1. Real estate is an asset. Just because there may be costs associated with it doesn't mean that it isn't desirable to own.
2. A number of major hotel brands franchise and provide management services; they don't own all of the properties that sport their brands.
3. Hotels are able to capture revenue from revenue streams that AirBnB can't, such as events and F&B.
This doesn't mean AirBnB isn't valuable, perhaps more so than certain hotel chains, but overly casual comments in the vein of "AirBnB doesn't have any buildings to maintain!" aren't the basis of a serious, credible argument that AirBnB is more valuable than major hotel chains.
> And Oculus- so they have little revenue now? They have decent revenue at all for a product that has only been released to developers. You even admit that VR can completely change the world, but don't do the homework to understand they're probably less than 2 years from a product release with massive community and business support? What, did your deadline come up and you just had to submit?
Occulus is a big question mark, honestly. Nobody knows how much it will be worth down the road. Even if the hardware itself is cool, there are several issues facing that market:
- you need additional hardware to use it, and the additional hardware is at least going to cost 500-600 USD for a good experience with the Rift. Peripherals don't have an history of selling very well.
- Currently we don't know if there are going to be killer titles to drive the adoption, and Facebook has zero experience to make games as first party. So they have to rely 100% on third parties which may be an additional risk.
- Occulus is a hardware product. Usually margins on hardware tend to be thin (i.e. thinner than on software), especially as competition is unleashed.
- VR to completely change the world. Meh, we've heard this in the past 20 years every single time something new came out from Silicon Valley, yet the world is very much the same - there were very few massive disruptions. I could think of a dozen reasons why most people wouldn't want to use VR on a regular basis.
- The game industry is not in a very healthy state right now, and if supposedly the Rift is going to be mainly for gaming, I'm not sure what this says about its future.
Of course, the Occulus Rift could ending up being very big, but it's actually a risky investment at this stage since there's not much proof of what size you can expect in terms of market at all.
Correct me if I'm wrong, but hotel chains like Hyatt, Hilton, Marriott, Ritz Carlton, etc. are franchisers. The company may own and operate a few hotels itself, but the vast majority are owned and operated by third parties. The hotel chain is essentially a booking service for others who want to rent their space.
In that respect[1] Airbnb is not very different. The bad news is, that's partly why they're facing regulatory grief. The good news is, they could easily be worth more than a Hyatt, because it's not as if Hyatt is worth X due to owning so many real estate assets (they don't).
[1]: In other respects, of course, it's very different. Airbnb doesn't franchise. The owner/operators are mostly individuals, not professional hoteliers.
No, it's the keyword of an investment. You're trying to grow your capital by investing in companies that you expect to grow in value. It's all about potential.
I am starting to get sick of every argument that tries to defend these rediculous investment decisions these days. Currently everyone doing that is citing network effects, potential growth, the next big thing.. And for sure, if someone wants to invest his or her money, I will not judge that decision or the person itself.
But looking at the situation as a whole, so many decisions are made based on highly flawed expectations. A nice designed marketing page and multiple years without revenue? Here take some $m because <insert overestimation in here>.
Consider Airbnb.. I use it myself, but I am by no means locked in as a customer. Maybe it will crumble due to new/old regulation. Maybe too many weird people will start offering their spare-rooms, and it won't feel cool and hip anymore. Maybe hotel-chains react by offering better prices... There are so many maybes in that company alone.. simply believing in the network effect should not be the basis of a meaningful valuation.
I am highly sceptical about the current behavior of this part of the investment market. My concern lies not in the companies or the investors themself. They probably did hedge their risks. I just feel that the next bursting bubble will stretch far beyond the whatsapps and airbnbs out there.
I don't think it's fair to lump the biotech firms in with the tech stocks.
Biotech firms are different for a few reasons. Biotech firms have a very long lead time before getting FDA approval and can start making money. Therefore, it shouldn't be unusual that they are showing a loss each year. You can't create a MVP for a drug and starting selling it.
Second, the value of biotechs is firmly linked with IP. If the drug works, no one else can sell it until the patent runs out (usually 8-10 years after FDA approval). The valuations you see are not based on current revenue/profit, but rather potential revenue/profit once approval happens. Tech companies don't really have the benefit of IP that biotech companies have (someone can make an AirBnB knock-off and there is nothing AirBnB can do about it).
That said, I think the biotech stocks are getting really high valuations lately. There is a TON of risk in biotech stocks. If you're drug has bad side effects, you might not get approval and future revenue = $0. Not quite the same as tech stocks where you can still enter the market, you might not do as well as you thought, but you still get some revenue.
Part of the issue with biotech is that it costs so much to fail. Companies have to spend massive amounts of money just to find out an idea isn't going to work.
There's a big difference between the dot-com IPOs of the late 90s and the IPOs of today: revenues. Some may express surprise that Candy Crush generated $1 billion of revenue, or that Facebook generates $8 billion / yr; and some may not agree with the multiples assigned to these companies by the markets; but neither of those thoughts makes the current environment comparable to 1999, when pre-revenue companies with unworkable business plans IPO'ed at high valuations. What I don't see in this article is any analysis of the growth potential, long-term margins, and defensibility that these businesses possess. That kind of analysis is crucial to a valuation discussion.
Twitter had $422 million in revenue in the three quarter before its IPO. Splunk had $121 million in revenue the year before its IPO.
Both were running at a loss, but they did both have a considerable amount of revenue. That puts them way ahead of many of the companies from the dotcom bubble since they at least have a proven way of bringing in money, even if it isn't enough to fully cover their expenses.
If you think that today's stock market is like 1999, then you weren't around to see the utter madness that was the stock market during the dot com days.
It was sheer insanity how crazy stocks were being bid up. Absolutely valueless companies were bid up 10x by day traders. There was zero sense of fundamentals, and fraud was rampant everywhere. The company I worked for went bankrupt due to financial fraud and many of my coworkers lost hundreds of thousands to millions of dollars.
Right now, we have essentially 2 companies, Google and Facebook, that are throwing billions upon billions of dollars worth of shareholder money to seemingly stupid ideas. And while I'm sure there's still plenty of fraud, you don't have anywhere near the same level of fraud as you did back during the dotcom days. I truly do believe that most companies and more especially CEOs are a lot more cognizant that they will go to jail for financial fraud if they step over the line, so they are a lot cleaner than they were 15 years ago, for the most part.
QE without funding welfare is dangerous. Increased consumption would benefit everyone with more money flowing through the whole society. Yes it avoids inflation this way, but I think it solidifies the power and wealth gap.
We keep the financial sector running, while we forget that the financial sector serves not itself, but really the rest of us: it exist to provide funds efficiently where it is most needed for our development.
Weren't there similar, though less dramatic circumstances in 1999 too though? ISTR that Alan Greenspan lowered interest rates in order to help fight the LTCM fire.
That was in 1997 though. As was the Asian crash and Russia default (which partly caused LTCM), so there are plenty of other reasons for the Fed action.
Good article but the bit about Oculus VR was way out of place.
You're going to put Candy Crush, a mobile match-three game valued at $7B, with a company producing top of the line VR hardware and legends of the 3d industry on its staff that sold for $2B?
It depends how you look at it. If you're comparing 2 line charts, tech stocks in 1999 versus now with no other contextual information, then yes it looks like 1999. Otherwise, the new wave of tech companies are leaders in highly competitive markets and have some significant revenue stats to prove it.
I would only start to get worried if a company like Box had a wildly successful IPO with ~$160m in losses, technology thats relatively easy to make, and lots of competition coming from the industry giants. That would seem bubbly to me.
The problem with finance related discussion forums is they wind up being used to generate fake information to try to drive pump and dump stocks. It's hard to keep them clean.
The thing that should scare you all, is that this article isn't wrong. If you argue that it is wrong, than I'm sorry, but you aren't seeing things clearly and this is going to hurt you most.
If you are making a good wage in this industry, put some away for when shit hits the fan. It's not a matter of if, it's a matter of when. Be prepared, friends, because shit is going to go down.
I think the key point they're missing is that most tech goes through a "hype cycle" of unreasonable expectations followed by a crash followed by slow, steady, solid growth[0]. That's the same trend at play here: it's not that the dotcom-bubble ideas were categorically idiotic, it's just that many were premature and overhyped. Now, a lot of those ideas are being done right, and people with a weak grasp on the underlying tech can't tell the difference.
During the 90s internet stocks were doubling or tripling in a matter of days. That isn't happening now. This market is very frothy but this most certainly isn't 99. That said, the market can go anywhere. The market could be topping right now and on it's way to DOW 5000, or it could be taking a break then go merrily on it's way to DOW 35,000. It doesn't matter what Schiff says, it doesn't matter what the cheerleaders say. The market will do its own thing.
First, investment pours into companies with users and revenue.
The next stage it's companies with users but no revenue.
The final stage is companies with no revenue and no users.
It's the Minsky-moment updated for the internet age. (first people take out loans they can afford to pay back; then loans where they can only afford to pay the interest; then finally people start taking out loans where they can afford neither the interest nor the principal payments)
Its worth pointing out that due to Sarbanes-Oxley, some of this will not happen on the stock market this time. So if you are just looking at P/E of publicly traded stocks you are going to miss the signs.
Well while it is clear the P/E ratios today are on average much lower than during the dot-com bubble, they are still high enough in some cases to warrant taking a closer look at whether they are 'reasonable', I think.
For instance although King.com has a P/E ratio at launch of around 10 and many other top stocks like Google and Apple have P/Es below 30, Facebook currently has an estimated P/E ratio (ttm) of 101.7 [1]; Netflix, Amazon and LinkedIn clock in at 213, 612 and 941 as of last February; and Twitter has a negative P/E ratio of -10 or so, having lost $645 million in 2013 [2]. Not a clear picture by any means, but it is fair to ask if all these valuations are reasonable.
The reference to the AirBnB valuation is completely misplaced: The best rated hotel chains don't own the real estate. Furthermore the ubiquitous coverage that AirBnB offers is unmatched by any hotel chain.
The current valuations reflect the perfectioning of business models and practices since the nineties. Everybody has learned a lot since.
AirBnB only targets one of the major segments of hotel business. AirBnB almost exclusively focuses on the consumer market. Hyatt, the example from the article, focuses primarily on other segments, business travelers and meetings and groups.
AirBnB has the potential to take away most of the consumer segment, but they don't have much appeal to most of Hyatt's customers.
Relevant quote, "The point is that even if prices are high in the overall market, they are being backed up by earnings to a much larger extent than in 2000. That’s important, because back then, when the dot-com bubble burst, the downdraft brought most companies down with it."
I wasn't aware that all the companies in the Russell 2000 were high growth. I was under the impression they're small caps, which has nothing to do with growth rate.
A doubling of the PE over the course of one year is not a useless metric in fact. It means you're paying twice an already extreme price for the growth you get, compared to last year.
It's a small nitpick about the article, but I found it hard to continue reading when the author called WhatsApp "a social media company with modest sales".
Whenever people criticize the market valuations, shouldn't Laissez Faire advocates say, "the market is always right?" There is something they don't know.
Economist believe in the free market as long as its not the price of new money ie the interest rate. Then most economists believe in that a central planned system is better via central banks. That is strange to promote that the free market is best in one way but not pricing another goods.
I think that central banks manipulation of the interest rates are creating the boom and bust cycles. Like Hayek and Austrian economics. When the price of new money is wrong it will be wrongly allocated which in turn creates economic bubbles.
Purely private money doesn't really work so well, because you can't really believe it'll be worth anything tomorrow.
Now, what the Austrians have right is that overly out of whack money supply is pretty bad, and no central body can really do that good a job at guessing right. But instead of throwing the baby with the bathwater, what can be done is to give the fed a mandate that directly lines up with something we want.
For instance, we could have a fed that alters the money supply looking straight at NGDP. A stable NGDP growth is extremely valuable, as it's the best approximation we have of economic health. So if the Fed targetted NGDP growth, and used markets due to their forward looking nature, we'd get a better policy overall, without really risking the instability that comes from having money that can't really be trusted.
>I think that central banks manipulation of the interest rates are creating the boom and bust cycles.
Boom and bust cycles have happened throughout human economic history, well before central banks. Take a look at the FRED data on recessions and tell me if the economy avoided such fluctuations pre-Fed.
Central banks do control interest rates and the reason this is done is to try to dampen boom and bust cycles.
However, there's no right or wrong price of money. A price that's good for most of the "real" economy (seen in unemployment rates) is not so good for deflating speculative investments. Similarly, a price that's good for Germany is not good for Spain.
Letting the market decide the price will choose a price. Whether it's the right price depends on your perspective. There's no reason it has to be the right price or even a stable price; see Bitcoin for example.
The thing is there is not a clear way to have a market control the creation of new money - the choice is between central control of the money supply and a fixed money supply.
There are some good examples out there of difficult-to-understand buys and misunderstood valuations- there's no way the WhatsApp purchase is ever going to recoup its costs(the userbase is irrelevant, at a $1 per year price it just isn't gonna happen, especially considering the WhatsApp founders claimed they weren't going to be charging any more than that or for many other services they wanted to provide, AND that they wouldn't have ads), King.com is just this year's Zynga(news to the tech investment scene: The games industry is not nearly as simple as you seem to think it is), and there's no shortage of questionable investments in smaller companies, to be sure.
But then, you use examples like Airbnb and Oculus as an example of tech industry madness?
"Airbnb is like a hotel chain without the hotels." Yeah. That means they absolve themselves of costs, growth time, investment into that growth, location issues, the works. They hacked the concept of a hotel, and found the holy grail for that market space. Frankly, if you think $10 billion is a ridiculous number, with them being worth more than Hyatt- I'd be inclined to wonder what holds them back being worth 3 Hyatts. They've got momentum, they've got product, and they've got the community. Short of the possibility of some grand competitor actually coming in and doing a bangup job, I think Airbnb's potential is at least an order of magnitude higher than this.
And Oculus- so they have little revenue now? They have decent revenue at all for a product that has only been released to developers. You even admit that VR can completely change the world, but don't do the homework to understand they're probably less than 2 years from a product release with massive community and business support? What, did your deadline come up and you just had to submit?
Look, it's fine if you think either are overvalued. But trying to use either in your examples for how we're in a 1999-style bubble is laughable. You hand us two of the best reasons we're not in a bubble and wonder why everyone thinks we're not. Really now?