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Has the Second Dotcom Bubble Started?
An article at the Guardian asks whether the exceedingly high valuations of social tech companies signify the arrival of a second dotcom bubble. Quoting:
"Every week, one of the new generation of internet firms seems to attract a sky-high valuation. Zynga, the social-network games company that has tempted millions to grow virtual vegetables in its FarmVille game, has been valued at $9bn (£5.54bn). Profitless Twitter is said to be worth $10bn. Groupon, vendor of online discounts, rejected a $6bn offer from Google and is considering a flotation with a potential valuation of $15bn. Tech-watchers say this is just the start: the real boom will come when Facebook, the head boy of the new dotcom frenzy, goes public, probably next year. ... The last dotcom boom really took off after the flotation of the internet software company Netscape in 1995. Patrick says this time it's likely to be Facebook that lights the fuse. So far, private investors have been locked out of the New Thing. But JP Morgan is setting up a fund, and Goldman Sachs recently tried to get its clients' money into Facebook."
Facebook '09 revenue neared $800 million...The company also earned a solid net profit, in the tens of millions of dollars last year, one of the sources said.
Yes, losing money hand-over-fist, if by that you mean, making money hand-over-fist. In other words, they (as far as we can tell) are extremely fucking profitable.
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These companies have real value - Google's a huge company with a market cap of $202 billion as of this morning's opening.
Thats hilarious placing "real value" and "market cap" in the same line. Market cap is nearly meaningless, its just the marginal price fluctuations times the number of outstanding shares. As if, in a thought experiment, you sold every outstanding share you'd be able to get the exact same price for the last share sold as for the first share sold, ha ha ha.
The actual real value of GOOG can be found at (where else?) finance.google.com, pull up GOOGs financials, click on balance sheet:
total assets 57851 - virtual made up junk slush fund accounting tricks like intangibles and goodwill -6256 -1044, subtract total liabilties 11610 and GOOG is really worth about 39 billion as of the end of last year.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Apple has currently a PE (Price-Earning) ratio below 20 (19-19.5).
It's well outside of speculative range, like any stable company with relatively little unknowns (barring Steve's health).
It takes all of five seconds: Apple's P/E ratio has been 18-20 for a while now. This morning it's 19.57. It's stock price has risen a lot in the last few years, but it has also been making and selling products like mad, and making huge amounts of profit (not just revenue) in the process.
If we're talking about P/E, let's make some comparisons:
Ford 9.42
MS 11.47
Acer 13.18
IBM 14.24
Medtronic 14.25
Pfizer 18.74
Google 23.96
Verizon 40.67
Netflix 79.48
So, in short, there's a wide range of P/E ratios among viable (and profitable) companies. Apple's P/E puts it a bit on the high end, but not wildly so. It is relatively cheap compared to, say, the P/E of the entire S&P 500. P/E is just one contributor that guides whether to buy or sell a stock.
Where you might be able to make an argument is that most of the established companies, particularly those with P/Es at or below AAPL's, pay out dividends, and that's one main way investors make money off them. The yield is typically 1-2% per year, so you'd still be waiting decades to earn back an investment through dividends alone.
Apple doesn't pay a dividend, and never has, so the only way to make money on it is to buy low and sell high. If you'd snagged it years ago, before the introduction of the iPhone, for instance, then sold today, you'll have made a boatload, several times what you put in. And that isn't a Ponzi scheme: you owned a share of a profitable company, and that company grew because it generated new business and made money doing so. The potential for making that money by riding a company's growth is a contributor to P/E. Apple has a good track record of breaking into new business and expanding, so its P/E is a bit higher. Ford is unlikely to capture a brand new and rapidly growing market sector, so its P/E is lower.
I'll be the first to admit I'm studying a double degree with an honours in economics, a bachelors in finance, and I'm picking up all the courses required to be an accountant (do the CPA).
This article was reporting on 2009's revenue (assuming it means 2009-01-01 to 2009-12-31, and not an FY measure) and given Facebook was started in February 2004, and given this is money in the door, 5 years for ANY start up to be profitable, is quite extrodinary, and more so revenue that high. While you could point to other companies which had similar runs, these are extreme exceptions in this industry.
Tens of millions in the early years of a company, and additionally such high turn over, is an extremely good sign. Depending on the modelling these people are using, a valuation of tens of billions can be rationalized. Whether or not it is.
Please note valuation functions are hardly ever simple ratios, while they might be used as one input, or as estimators of other variables, but a profit ratio is unlikely, as its highly affected by different accounting treatments. People outside the company may use this, but can't use it for comparison, or as a reasonable estimator. You'd be better off with a revenue ratio instead.
A simple world, with simple math, to me is the constant growth model. Given they haven't distributed a dividend, and are high growth, we'd likely use free cash flow (but that's also probably highly subjective and unstable), a high growth (a measure of standard deviation would be simplest), and a cost of capital (given you're valuing the firm, and not the equity, something like WACC).
This is an extremely simplistic model, and yet it's immensely more complicated than yours.
If I were valuing this company, I'd be more interested in how its being run, potential future prospects, and whether it could fit in my portfolio well.
IPO's aren't the only way to go, in this instance if they are profitable, can hold on, and are willing to bare the risk, then why would they sell now? Given they didn't need an extreme amount of cash for investment. The life cycle of a company, which doesn't necessarily reflect tech companies well, but could be handy here, shows a company doing R&D, starting, growing rapidly, and smoothing off to become stable. At present they'd be in the rapid growth phase, and if they can fund it internally, they stand to make a LOT more money in the end.
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During the last bubble, 3 digit, and even 4 digit, P/Es were not all that unusual. Most of those companies listed in the parent post, have P/Es around 20. If this is a bubble, it's certainly nothing like the last bubble.