01 July 2011

It's not a bubble

Its different this time aound. There's real revenue behind these companies with proven business models.  Social media, ecommerce, and advertising are now mainstream and have matured significantly from the late 90's.  Even if many of these points are true to a certain extent, none can justify the valuations that are currently in front of us.

LinkedIn is trading at about a $9B valuation, Zynga and Groupon both filed for IPOs as high as $20B.  The beauty of each of these (along with the others) is the fact that none are profitible yet.  Some like Pandora say they won't make any money in the "forseeable future."  Analysts, for example, justify LinkedIn's price target based on 65X 2014 EPS and the 100M users they currently have.  We're paying on eyeballs again; welcome to Netscape 2.0.

Why are investors making the same mistakes as they did in the late 90s?  We are not myopic enough to forget the worthless stock notifications (especially atmabus) from 15 years ago.  Even smart money is getting in at these lofty valuations; This week, Kleiner Perkins invested in Square at a $1B valuation.  Some of the first bubble carnage is still on the road (MySpace just sold for 1/16th of original price).

These companies are growing and showing relevant top lines now.  People do spend money on virtual tractors ($850M in 2010).  As i wrote about a year ago, the days of all things free on the net are no more as companies now monetize what they were afraid to in the past.  Management teams are more sophisticated and actually operate businesses for profit (except Twitter :).   At these valuations, however, one has to assume market transformative disruption.

Google killed newspapers and took a huge slice out of traditional ad dollars.  Amazon eliminated bookstores and cd shops.  These were huge industries that are no longer on the map.  Will Zynga kill off Electronic Arts or Playstation?  Groupon will take a google-sized cut from company ad spend?  Unfortunately, these days, the incumbents are much more savvy that they were before.

NBC/FOX (and others) established Hulu because they didnt know how to play in the nascent streaming space with little intention of making any money from it.  They now want to dispose of it so they can create their own meaningful net revenue streams.  They still own the content that everyone wants so they can charge what they want. Just ask Netflix.  Newly traded Homeway, despite its unique niche, will not replace hotels. Yet it trades at 1/3 of the value of Marriott and Starwood already. Cloud software packages might have interesting platforms but will not replace Oracle who is already embedded in most large corporations. 

Don't expect all of these high flying startups to take down established players to the extent their valuations imply.  Incumbents are not surprised anymore about people spending more time on the net or buying things recommended by Facebook friends. As i've always said before, the internet is merely a new distribution channel not a new business.  Although my demeanor would be different if I got in on the IPOs, i can't shake the time warp feeling of 1998.

1 comment:

  1. Very nice thought provoking take on the current technology cycle. I notice that you mention almost all of what i would consider the tier 1 companies that dominate their respective categories. Earnings and to an extent revenue valuations have often proved as false signals to investment window opportunities in the past for truly "dominate" companies.

    I am struggling with this now as many of the key players have/will go IPO over next 12 months. It is differnet this time as you say with two additional factors to consider: Unlike the last tech boom/bust, terminal value will be created mostly on the private side of more of the leaders that on the public side simply because of those in position scaled faster(number of users, the globality of avail. users) than in the past, and takig much longer time to IPO. More of the value as a result is baked-in before becoming available as public equity. This is truly a heyday for the top VC firms.

    Since this process has evolved much faster that in the past, i believe we already have category winners in many areas earlier that in previous cycles and requires the public invstor to include competitive advantage as it relates to competition and the size of the market being truly disrupted as a metric to consider strongly.

    Would like your thought on this line of thinking.