Slashdot Mirror
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."
The problems that monetizing free services like Facebook are largely as follows.
-The value of the product to users is determined by the number of your friends that use it. It's value to consumers massively diminishes if large swathes of your friends dont use it. Its the same reason I don't use MSN messenger anymore. That's actually a really great product, but I don't know anyone else who uses it, and that pushes its value to 0. What this effectively means is that Facebook cannot charge users for content. As soon as they do that, some people will leave, which pushes down the value for money that users who want to stay get. So they leave too. No future there.
-So if they can't charge, how do they generate income? As we know, its largely advertising revenue. That's true of Google, and Facebook, and any aspiring free products out there. The success of that model is difficult to predict. On the one hand, the amount of information about users that these companies can get is astronomical. It is certainly of use to advertisers, and they are probably willing to pay huge sums so that they can integrate that data into their systems for personalized adverts. On the other hand, I've yet to see personalized advertising systems which is accurate enough to be of value. I've never clicked any Google or Facebook ads because they have never hit anything that I would want. Until that gets addressed, there's not a huge future in that either.
Is it just my observation, or is eldavojohn an idiot?
During last dotcom boom companies had no usable plan to get income. However, Facebook is advertisers dream with its extremely targeted advertising system, Zynga has a huge amount of casual players and both advertising and direct payment system and groupon receives good money from the stores. They all have business plan. They might have to work on them a little bit as they're still so new companies, but they definitely have one that work.
That's why it's not a second dotcom bubble - it's just that the masses have started using internet a lot more than before and web itself has changed.
It's not often I agree with a piece in the Guardian, but on this occasion, I think they're onto something. I remember the build-up to the first dotcom bust and a lot of the signs are showing up again. The over-valued floatations of profitless companies are certainly the most obvious of these, but there's a lot more than that out there if you want to look for it. Most worrying for many slashdot readers (though not for me with my nicely non-IT-based job), I'm starting to see the same kind of rush towards IT and computer-science based courses that we saw in the 90s, as the area became seen as a good route to "get rich quick". More competition for jobs and downward pressure on wages on the way.
Actually, I think the Guardian article is, in some ways, a little under-stated. It assumes that we're about to see the start of the bubble, which will begin in earnest with a facebook floatation. I suspect that we're actually a bit further along the cycle than that - already well up on that bubble and waiting for it to burst.
Of course, things won't be absolutely the same this time as they were in the original boom. I think the first boom and bust was characterised by a lack of understanding over what the public actually wanted out of the net. Pretty much everybody who was a significant online presence in those days was a new startup of one form or another and what the bust really did was sort out the wheat from the chaff. The businesses who had hit upon a successful model - like Amazon - came through it just fine. Meanwhile, the likes of Boo.com were exposed as fundamentally unviable - the public weren't remotely interested. It's worth remembering that outside of a small number of finance types and journalists, nobody was actually even looking at the sites of most of the victims last time. I was a heavy net user at the time and I remember seeing these huge IPOs for companies that I hadn't even heard of.
This time around, I think there's a better understanding of what people are interested in. The problem this time isn't the "everything dotcom is exciting" myth that we had last time. Rather, it's the "this is popular, therefore I must be able to make it insanely profitable" myth. The huge valuations are being attached to companies that have already undergone some fairly extensive testing in the court of popular opinion. The problem, however, is that that popular isn't the same as profitable and, I think, the lessons of the last 15 years or so indicate that making them profitable (at least to a degree that justifies the IPO) will likely not prove possible.
Advertising isn't going to do it alone in most of these cases. Sure, advertising is always going to be part of the online economy, but it's been proven time and time again that it isn't a silver bullet - not least because so many people these days just block it. At some point, a lot of these businesses are going to be pushed in the direction of starting to charge for content or services that they have been offering for free. And in a world where people have been used to having these things for free - and where free alternatives will still exist - I don't think that's going to work. Particularly not for social networking enterprises like these, where a lot of their value hinges upon the fact that everybody you know uses them. Some companies may fare better (just as some did in the first bust) - those selling casual games, for example - because they're already extracting revenue from customers.
I just ask a simple question: "Is this company selling a product that people will buy?" If the answer's no, then the company's story probably isn't going to have a happy ending.
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).
I'm surprised that this article didn't cover what is probably the most obvious example of a bubble stock: Netflix. While Netflix is indeed making money, they are not making (nor have the potential to make, due to various reasons) what their stock is currently valued at. But, the problem is people think "oo netflix that's the way of the future, not old fashioned cable providers" and they pump their money into it.
There are many articles about Netflix being a bubble, but here's the first one I found off of Google which summarizes a portion of the problem: bubble.
I think the difference between the last .com bubble and this one is that in the last one, companies had no way to make money, whereas in this one they are making some money, just nowhere near the crazy valuations that investors are giving them. The mindset is the same as last time, but the implementation is somewhat different.
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.
Groupon seems to me like one of those ideas we'll look back in retrospect and think, "Why was it worth that much? It was so obvious!"
The idea of landing a big number of first-time customers sounds great until the customers start coming in. From the experiences of business owners I know, Grouponers were, simply put, cheap (not condemning cheap people here, as the times demand it for many.) If the groupon is "get $50 for $25," you better damn be sure most customers will spend the $50 and not a penny more. And if it's a restaurant, they'll tip on the $25.
I expect that those customers will not be back; they will move on to the next goupon.They're not looking for a new place to eat; they're looking for a deal.
And for consumers, the deals are already being watered down by the typical (one month free at the gym, or free karate classes for a week) that you see everywhere.
As for the businesses themselves,I wonder how many more of these kind of situations we'll see - a restaurant using a Groupon-like company hoping to land quick cash in desperation.
Also, from my conversations with people who own businesses, Groupon's sales approach is very aggressive. They put dollar signs in the business owner's eyes. But eventually, they'll get found out. Right now, people don't want to miss out on this since all the cool kids are doing it.
Of course there are businesses who've had great results with Groupon. I just think it's lunacy to think they're worth $15B.
Not necessarily "perfectly good". A structurally sound house in the wrong place is not perfect and not really good. In a way, this mirrors the soviet failure, rather than capitalist problems. The soviets assumed that if a factory was working at full speed producing whatever had been specified, it was doing good work. But producing obsolete or excessive goods is a net loss. If you could move houses from the rustbelt to the sunbelt, your observation might be true. But you cannot, and it is better to scale back the shrinking communities to a functional size than continue to mimic a city with four times the population.
(Or you can try to relocate jobs to where the houses are. if you succeed in that, your fortune is made, just on the lecture circuit).
Consciousness is an illusion caused by an excess of self consciousness.
Facebook 09 estimated revenue is indeed $800 million...yet Goldman Sach's offer could place the total value near $50bn. That's laughable compared to Groupon, who saw profits around $350 million, yet were only offered $6bn. If Facebook really is worth $50bn (it's not) then Groupon was right to reject the offer. Hell, that $800 million is only revenue. I'm sure it's probably not by very much, but their income is going to be less.
The smart investor won't dump money into a company so overpriced as Facebook when you look at the money they can get. Besides, how long will it be until Facebook is unseated? 5, 10, 15 years?