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."
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.
-So if they can't charge, how do they generate income? As we know, its largely advertising revenue
And that brings up problem #2 that the last bubble happened in an inflationary flood of credit and generally increasing (at least nominally) incomes. In a deflationary environment, you can't grab a slice of the pie and watch it grow, even just to stand still you have to convince your customers (advertising agencies, etc) whom have a shrinking revenue stream, that their dollars are better spent on your dotcom ads than spent on TV commercials, print ads, billboards, whatever.
Every millisecond spent on facebook is a millisecond not spent at home depot or related pursuits, not spent eating at a restaurant, not spent buying a car or driving around... Computer product importers / retailers and ISPs are pretty much the only industries that are a good fit for facebook.
You want to reach car buyers so you can sell more cars, you put a billboard on the biggest interstate in town, you advertise on TV during nascar races, and you put print ads in a car magazine. You don't advertise to peasant subsistence farmers, real or virtual farmvillers. The real ones can't afford it, and the virtual ones are more interested in clicking mice than driving cars. Facebook, etc, is too old and too wide spread to dazzle them into investing in something "new", since everyone's had an account for years.
In other words its hard to bubble off shrinking advertising revenue that would be targeted to the wrong people anyway.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
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.
Facebook's valuation is a real mystery to me. It's valued at $50 billion. It has 500 million users, which looks like a lot, but that puts it's worth at $100 per user. Do you think you are worth $100 to facebook? Do you know anyone who might be?
The value of a company is generally about 10 times its profit, so facebook should be making $5 billion profit a year, or $10 per user. And that should be profit, not revenue.
$50 billion is also about a third or a quarter of what really big companies like Google, Oracle, Apple and Microsoft are worth. Is facebook really that close to that league? I think anyone buying facebook stock at this price is insane.
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.