Are Tech stocks in a BUBBLE?

NASDAQ tech stocks like Apple got SLAUGHTERED today. Is this indicative of an UNDERLYING TREND? Are we in a BUBBLE? Do you the rest of you monkeys think the market, especially the tech sector, is SYSTEMICALLY OVERVALUED right now? Should I just invest in a MARIJUANA ETF instead?

Discuss!

 

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I would be deeply suspicious of investing in a company like Facebook or Twitter. I mean, at some point, your valuation is based on current expectations of future popularity, which doesn't sit well with me*.

If it's a technology company that people spend money on, then I could see the argument going either way. Sure, Amazon appears to be, by all historical metrics, overvalued. However, take what's happening in technology (and more generally, the 'Software Eating the World' storyline) to its logical conclusion, to a world where Amazon has demolished the business models of traditional retailers. In that world, it's not simply a matter of slapping a historical P/E multiple on Amazon's 2013E earnings and calling it a day -- not if they're the only player left. (I am obviously alluding to this extreme for elucidation purposes, not because I believe that this is necessarily going to happen). In some sense, you could argue that Amazon's valuation is defensive, fueled by investors who don't want to be caught with their pants down when Macy's goes out of business.

*This would seem to preclude me from investing in a lot of consumer companies, but I would argue that there's definitely a line between investing in Facebook and investing in Coke-Cola (although it's entirely possible that the main difference is simply a matter of time horizon).

 

what about netflix. thats a bubble stock too. and ebay and google are into high valuation territory, both trading well over 20 p/e ratio, and most of the google's smartphone is a losing business. ebay's business is problematic due to the high fees making it less worthwhile to use it

 
Best Response

I'm pretty sure we're in a bubble, but it won't be as dire as what Gurley implies publicly.

The truth is that too much capital has been flowing into venture capital. When early-stage funds are raising billion-dollar rounds, and when Series A rounds (especially if they're the first institutional rounds) are topping 20-30 million dollars, it's typically a warning sign that things have gotten out of hand. Pre-product, pre-revenue companies should not be valued at 50 million dollars.

At the same time, some companies that have garnered unicorn status are truly revolutionary. Uber will not only change the taxi cab business, but it will change the way we view car ownership as a whole. Several prominent people have done the math and concluded that Uber is actually cheaper than owning a personal vehicle, especially in cities where parking is prohibitively expensive. Airbnb is changing the way we view accommodation. They sell the message of friendliness and reliability, but their actual value proposition is cost. They're cheaper than hotels (personal is almost always cheaper than institutional), and therefore they will retain their popularity.

Snapchat's valuation makes me pause, but think about their traction. They have unbelievable engagement with pre-teens and teens. Kids who grow up using visual messaging systems will default to visual instead of textual. Snapchat, in this regard, has real potential to cause substantial shifts in the way we communicate. The company's philosophy is outlined in this video:

Gotta give it to Evan Spiegel there - he sold me on the vision.

We're moving into a mobile first world. If you read Mary Meeker's report, you'll see a massive, profound shift away from traditional media toward what is now considered 'new media,' optimized for our always-connected, impatient, demanding, lazy selves. Smartphones have enabled massive changes in the way we do almost everything, and as market penetration grows, so will the number of people seeking alternative solutions to everyday problems.

The big picture is simple - technology is no longer just the technology industry. Slowly but surely tech has seeped into multiple verticals, and will soon directly impact ALL of them. Amazon has disrupted the consumer/retail and logistics industries, Apple, Google and Netflix have turned to telecom, Uber is disrupting transportation, and Airbnb is disrupting hospitality. There are other examples in other verticals.

If we can believe Marc Andreessen and his software-eating-the-world philosophy, we can be assured that this is no ordinary bubble. We're not dealing with dot-coms that add no value. We're dealing with a very real movement catalyzed by constant connectivity and an increasingly on-demand, user-experience focused economy.

But there's a classic article that Seth Klarman referenced in Margin of Safety - the article stated that there was so much capital flowing into storage technologies that there was no way the VCs would profit in the end. I feel like that's what is happening again. There's so much capital in venture capital that firms are making stupid investments. Only the top firms will come out on top when people get back to their senses.

 

Lov'd this. +1SB.

Someone brought to my attention, that because of things like Instagram, Vine, Pinetrest and Snapchat the kids/adults under the age of 25 are very much more visual learners, and it has massive implications for everything.

Wanna know what I think could rival Google (not literally but at least put up a substantial fight) a search engine that when you type in your search option, it didn't bring up descriptions and the title, but rather something in bubble form showing images of the websites, maybe showing the instagram page, recent tweets and blah blah blah.

But a more visual way to search which appeals to the younger generations and those which are coming up.

View my amateur mock up below: http://s30.postimg.org/u5si8ix1t/WSO.png

However with more options and various bubbles, maybe even a bit more disorganized and shaped with large bubbles and small bubbles due to web traffic. Just an idea but I've always though google is great at searching and giving you what you want, but just wish it'd give it to me the way I want it.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 

Looking at some of the major tech companies they're innovation and great, however they have a flawed business model which heavily relies on advertisement. This constrains them as they are at risk of scaring away customers if they go too far. While many do have sound business models the metrics do not support the valuations. Just a few examples-

Twitter: P/E Current: -28.91 Price to Cash Flow Ratio 265.31 Enterprise Value to EBITDA -49.91

Amazon: P/E Current -1,036.29 Price to Cash Flow Ratio 20.96 Enterprise Value to EBITDA 54.90

Facebook: P/E Current 85.76 Price to Cash Flow Ratio 38.09 Enterprise Value to EBITDA 40.04

Splunk: P/E Current-32.71 Price to Cash Flow Ratio 59.50 Enterprise Value to EBITDA -33.51

 

Be careful with some of those numbers - a P/E with negative earnings is completely arbitrary unless you can derive the source of the loss. The P/S for those three are going to be slightly more informative.

Specifically, it appears Splunk has been financing growth with earnings, as they have relatively low debt and high expenditure in R&D/marketing. Note the 41% and 46.4% YoY growth from 2014 and 2013 respectively. I don't know anything else about their business, however, and frankly they seem out of place in a list with the other three.

 

yeah, I agree with you that the valuations are sky high for most of these, but P/Sales ratio is a lot more meaningful vs. showing a negative P/E or EV/EBITDA multiple (which means nothing since if/when the earnings ever turn positive at $.01 of earnings, these P/Es will be positive and extremely high)....

Take Amazon for example...you could have said the 2.6 P/S ratio was super high in 2011 as well...it dropped to a low of 1.5 early this year and has gradually come back to 2.6 peak...but it's been growing like a BEAST for years. I think looking at these multiples it's just a clear indication that the market thinks these companies are going to have insane growth over the next X years....the reason Twitter has crashed so hard is because that growth (specifically user) has come under pressure and it's why I think Facebook is grossly overvalued...but don't think I'm dumb enough to short these right now when the FED can't even raise rates 0.25bps

FREE MONEY!!!!!

This could end badly if things get further extended (I don't think they will and as a whole the market hasn't really become "disconnected" from fundamentals like in the past...at least not yet!)

 

Yes we are in a tremendous Vc bubble, one word can describe it for you: surveymonkey. Look up how much debt and equity they have raised since inception.

Also Uber is a Ponzi Scheme. They are like the Friendster of the car sharing realm.

A16z says there is no bubble because it's not in the stock market and not as much money involved as 99. The truth is that the bubble is in the Vc market and I think more actual equity injection is happening now, as opposed to ipo investors buying out vcs. so it's had an even bigger impact in terms of jobs etc.

 

36 engineers! I mean, wtf is going on here?? In what universe do you sit and think, hey, we should spend $19 billion dollars to acquire some app that 36 hipsters created instead of developing our own version in house for like, I dunno, $100mm... (100 high paid FB engineers for 2-3 years). The social media bubble is about to burst, I can feel it.

 

http://www.businessinsider.com/why-facebook-paid-19-billion-for-whatsap…

Provides some insight on why FB paid $19 bn, but that is still a ridiculous price to pay. I thought Instagram was expensive. Whatsapp is bought for 3x Blackberry's market cap, and to think of it, BBM was the dominate messenger application just a couple of years ago. If only they had focused on its messenger service and/or enterprise customers...

"Try and fail, but don't fail to try"
 

w1420, there was (purportedly) a competing $10B offer from Google. Even if Facebook did overpay, what you're saying (and what almost every talking head is implying) is that Mark Zuckerberg, the person who has made the most money in the shortest amount of time ever, is an idiot. I don't think that's the case, and I think the valuation is justified when you consider that Zuck is trying to get his fingers in every communication platform pie in existence. At 450MM+ MAUs, with 70% of them being DAUs and the MAU count growing by 1MM+ every day, I'd say he made a pretty good bet and paid a premium to what were likely a host of other competing bids.

I think MS Tech did a phenomenal job representing their clients, and if anyone should take heat it's Allen & Co. However, since this was a competitive bidding process my guess is that Zuck wanted WhatsApp badly and went to his board to get approval, got it, then gave Allen & Co. the mandate to do what it took to get the deal done. I can't think of a client on the face of the planet that would revert to their advisor and say, "Geez, you did a terrible job because you made too much money for me." If anything this deal is a huge feather in their cap. Even in the midst of massive multiple expansion in tech, selling a company for ~$40/user is no small feat. Not to mention the $3B in RSUs gives the team significant motivation to continue to build out the product and make it successful. How's that for an earnout?

Long V, MA, AXP, DOGE.
 

From Dan Primack "FORTUNE -- Earlier today I appeared on CNBC to discuss Facebook's (FB) stunning $19 billion purchase of WhatsApp, the mobile messaging platform that has grown from 200 million users to over 450 million users in just the past nine months. In short, the hosts wanted to know if it was a smart or dumb deal. In all honesty, it's WAY too early to say. But I wouldn't bet against Mark Zuckerberg just because this deal feels oversized at first blush. Remember, so did Instagram. What does seem clear, however, is that this deal should seriously concern some other players. Like Google (GOOG), which spent more than a year (unsuccessfully) trying to buy WhatsApp. Or rival messaging apps like Kik, Snapchat and WeChat -- all of which just lost a major suitor, and now may need to battle it out to be number two. Or current wireless carriers, who make a fortune off of SMS (the functionality that WhatsApp virtually gives away for free). Or Apple (AAPL), if only because some of its shareholders may now feel that it has totally missed the boat on a giant new opportunity, despite having the resources to have bested Facebook. Anyway, here is the CNBC conversation with myself and Business Insider's Henry Blodgett..."

http://finance.fortune.cnn.com/2014/02/20/did-facebook-make-a-mistake-w…

Long V, MA, AXP, DOGE.
 

As always with things related to valuation, I recommend everyone read Professor Damodaran's analysis of the Facebook/WhatsApp deal: http://aswathdamodaran.blogspot.com/2014/02/facebook-buys-whatsapp-for-…

In a nutshell, Damodaran argues that the valuation is difficult to justify from an "investor" point of view, but from a "trader" perspective, may be pretty good.

 

Who's buying the shares?

Why can't the institutional investors who spend all their time analysing these companies and have vast knowledge about what is happening in these companies and in the market see what is so plainly obvious to a group on an internet forum largely made up of college students and early stage professionals?

Not saying I agree with these crazy valuations but it is easy to throw out the "Bubble" argument without penetrating the surface and understanding what is really happening.

Aswath Damodaran's post on the whats app transaction is one of the most well reasoned and sensible things I have read about this.

Also worth keeping in mind that investment value and fundamental value are two different things.

 

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