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"Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E)" Those are some nicely cherry picked examples of mature companies that have been around for a S

"Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E)" Those are some nicely cherry picked examples of mature companies that have been around for a Silicon Valley century. But I don't think the bubble involves mature tech companies but rather is in the private markets for emerging tech companies. The recent IPOs are certainly indicators of this... Linkedin - P/E: 940 Zynga - P/E: No earnings (6B mkt. cap.) Groupon - P/E: No earnings (7.5B mkt. cap.) Pandora - P/E: No earnings (1.5B mkt. cap.)

pdeuchler 14y ago
Playing devil's advocate I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth. A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet. Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable. Similarly, one might even argue that some of these companies are undervalued. Facebook's mindshare and ubiquitousness among the upcoming generation is without a doubt a new phenomenon, and so one could say that their current valuation approaching 100 Billion is small considering it's only based on the current monetization scheme of advertising (you would also have to argue at the same time that more efficient monetization ideas exist). tl;dr- It could be unwise to measure new age technology companies with old age metrics when discerning value Obviously, there are some outliers like Groupon that do create large valuations with little value (arguably)
- moocow01 14y ago
  I'd agree the P/E isn't the be all and end all of company valuations and I think you make valid points. I think whats more odd is that the article's argument starts out with something that I see as more of a straw man argument. I think if you're going to throw P/Es into the tech bubble discussion, you have to at least address the very high P/Es of the notable SV IPOs and why they are justified. I guess the initial point just comes off as somewhat off-point and disingenuous to me, whether its a bubble or not.
- incongruity 14y ago
  I feel like I heard this same thing before... just over a decade ago. Here's the deal, economic value is all about returns on capital. User value or some other sort of "value" may well fit with what you're arguing, but fundamentally, economic value is all about return on investment. That means how much is my investment growing? Growth, therefore, must be measured in real dollars. If it's not able to be converted into a liquid asset, it's not real, it's speculative. So, until such time as you can actually, demonstrably monetize the "value" you're asserting exists in a company like Pandora, is, in fact, speculation and nothing more. Bubbles are driven by speculation en masse. Some people get rich in them (because they sell before the crash). Every time there's a bubble, people start talking about how the old rules don't apply. Thus far, every time, they've been wrong... and it's because to increase value, you need to be able to monetize the offering. If not, you're creating user value, but no economic value. Over anything but short-runs, investors want returns on capital – because you can find them elsewhere... so if your capital is tied up in an investment that isn't actually producing monetizable products, it's not producing capital gains. Therefore, there's a clear opportunity cost associated with putting capital some place that it's not growing in any sort of real (i.e.: liquefiable way within some predictable timeline) – and if the investment stays like that for too long, investors will go elsewhere, for greener pastures.
- tatsuke95 14y ago
  >"I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth." In other words...this time it's different! Sometimes it is, but more often than not, it isn't. >Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable That's a circular argument. The whole point is that very question: what is controlling the source of 100 million users worth? Apparently not enough that you can make money off of it at a reasonable scale.
- zorked 14y ago
  > A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet. In other words, their inflated valuations are somehow justified by the fact that there is a lot of risk involved?
- ebaysucks 14y ago
  Unrealized potential earnings translate into a higher P/E, they do not make the entire concept of P/E invalid. Your flawed way of thinking is exactly what prevails in a bubble.
- potatolicious 14y ago
  > "Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable." Valuable to whom, and to the tune of how many dollars? I'll agree that some startups have the potential to be worth a lot of revenue down the line - I mean, it is how nearly all startups get off the ground. But this doesn't seem like the case here - Pandora never really saw very much revenue despite dominating the online streaming market. Their valuation was always based on an ephemeral notion of being able to monetize better some undetermined time in the future with their user base. And then Spotify and Rdio came in... so now Pandora's market share is at risk long before they ever got around to really monetizing their users. So while your point is theoretically valid, in reality 99% of the time it simply doesn't apply.
- pdeuchler 14y ago
  I'm not disagreeing with any of you, like I said above, simply playing devil's advocate :)
Estragon 14y ago
This confuses me. I believe Zynga has earnings, because in the comments of the OP Fred Wilson estimates their P/E at 13x ("Zynga trades at something like 13x pre-tax cash flow when you back out the $1.5bn of cash they have.") And I know Pandora has earnings, because I pay them $36/year myself.
- cletus 14y ago
  Revenue != earnings. Earnings = revenue - expenses It's super-important to remember the distinction.
  - Estragon 14y ago
    Thanks, I understand.
- moocow01 14y ago
  P/Es are a little confusing... earnings by that metric really means net income or earnings per share. In other words their liabilities and costs figure into "earnings". Fred Wilson is using some wonky math there. Using projected earnings their P/E would be easily be calculated at 100+ and possibly much more. They would really have to do something out of this world to have a P/E in the teens. http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii
  - fredwilson 14y ago
    here's the math. it is not wonky. market cap = ~$6bn, cash = $1.5bn, enterprise value = ~$4.5bn, pre-tax earnings/EBTIDA in Q1 = $87mm, annualized = $358mm, enterprise value/annualized ebitda = ~13
- rhplus 14y ago
  Forbes ran an article recently describing how some social media companies may be deferring revenues of digital purchases by classifying them as "durable goods", which could be seen as a way to make themselves more attractive as an ongoing investment. The Forbes article is quite skeptical. Worth a read: http://www.forbes.com/forbes/2012/0507/features-social-media-zyga-facebook-groupon-phony-accounting_print.html http://www.forbes.com/forbes/2012/0507/features-social-media... Your $36/year is revenue, not earnings [1]. Unless I'm misreading the numbers, both P[2] and ZNGA[3] still have yet to report a profit and establish actual ratios for P/E. [1] http://en.wikipedia.org/wiki/Earnings http://en.wikipedia.org/wiki/Earnings [2] http://finance.yahoo.com/q/ks?s=P+Key+Statistics http://finance.yahoo.com/q/ks?s=P+Key+Statistics [3] http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics
joejohnson 14y ago
Zynga has no earnings? Nasdaq lists them as having a P/E of 39 for 2011. http://www.nasdaq.com/symbol/znga/pe-ratio http://www.nasdaq.com/symbol/znga/pe-ratio Groupon's is -12, however: http://www.nasdaq.com/symbol/grpn/pe-ratio http://www.nasdaq.com/symbol/grpn/pe-ratio Where did you read that Zynga has no earnings?
- moocow01 14y ago
  Its probably just best to look at their financials in that there is a lot of interpretation. You can look at GAAP vs. non-GAAP and trailing and forward earnings as well as a number of other things to come to a P/E. In other words they are different depending on who is running the numbers and what metrics they are using. Probably best to come to your own conclusion... http://investor.zynga.com/releasedetail.cfm?ReleaseID=667869 http://investor.zynga.com/releasedetail.cfm?ReleaseID=667869 http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii
  - joejohnson 14y ago
    You can come to whatever conclusion you like, but the fact is Zynga has earnings. Read Fred Wilson's comments in this thread if you're still confused.
    - moocow01 14y ago
      The fact is that under GAAP Zynga has had huge losses the last 2 quarters and under non-GAAP it has earnings. That is according to Zynga itself. For how the market responded to these mixed earnings figures you can look at Zynga's haircut since they announced the figures on the 27th which resulted in a drop of 10%
      - jpdoctor 14y ago
        > and under non-GAAP it has earnings. Yes, when it ignores arbitrary expenses, which are considered legitimate by GAAP, it turns a profit. Coincidently, when I ignore expenses incurred by my wife, my income also goes up considerably. Want to invest?
fredwilson 14y ago
zynga has earnings. $87mm of pre-tax cash flow in the first quarter that was just reported. Zynga has had earnings/profits/cash flow for years.
- moocow01 14y ago
  This is also half the story. Under GAAP, net income was -85 million last quarter and the quarter preceding it was -435 million.
- jpdoctor 14y ago
  > zynga has earnings. http://finance.yahoo.com/news/zynga-disappoints-again-141528576.html http://finance.yahoo.com/news/zynga-disappoints-again-141528... "Net loss was $85.0 million in the quarter compared with net income of $65.1 million a year ago." I assume you realize the point of having Generally Accepted Accounting Principles is that they are generally accepted. You could maybe create a market for VC-Accepted Accounting Principles (VAAP), but I thought that died in the first tech bubble. Apparently I was wrong.
  - fredwilson 14y ago
    GAAP is nonsense. cash flow is what matters. i suggest you go look at all of those non cash charges and see if you think they are really expenses of the business.
    - lsb 14y ago
      Wait, why are generally accepted accounting practices nonsense? And, if so, why are they generally accepted? I don't know much about accounting, so this question is in earnest.
      - fredwilson 14y ago
        they are generally accepted by the accounting profession. but not by investors. investors tend to focus on cash flow. at least the smart ones do.

pdeuchler 14y ago

Playing devil's advocate I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth. A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet. Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable. Similarly, one might even argue that some of these companies are undervalued. Facebook's mindshare and ubiquitousness among the upcoming generation is without a doubt a new phenomenon, and so one could say that their current valuation approaching 100 Billion is small considering it's only based on the current monetization scheme of advertising (you would also have to argue at the same time that more efficient monetization ideas exist). tl;dr- It could be unwise to measure new age technology companies with old age metrics when discerning value Obviously, there are some outliers like Groupon that do create large valuations with little value (arguably)

moocow01 14y ago
I'd agree the P/E isn't the be all and end all of company valuations and I think you make valid points. I think whats more odd is that the article's argument starts out with something that I see as more of a straw man argument. I think if you're going to throw P/Es into the tech bubble discussion, you have to at least address the very high P/Es of the notable SV IPOs and why they are justified. I guess the initial point just comes off as somewhat off-point and disingenuous to me, whether its a bubble or not.
incongruity 14y ago
I feel like I heard this same thing before... just over a decade ago. Here's the deal, economic value is all about returns on capital. User value or some other sort of "value" may well fit with what you're arguing, but fundamentally, economic value is all about return on investment. That means how much is my investment growing? Growth, therefore, must be measured in real dollars. If it's not able to be converted into a liquid asset, it's not real, it's speculative. So, until such time as you can actually, demonstrably monetize the "value" you're asserting exists in a company like Pandora, is, in fact, speculation and nothing more. Bubbles are driven by speculation en masse. Some people get rich in them (because they sell before the crash). Every time there's a bubble, people start talking about how the old rules don't apply. Thus far, every time, they've been wrong... and it's because to increase value, you need to be able to monetize the offering. If not, you're creating user value, but no economic value. Over anything but short-runs, investors want returns on capital – because you can find them elsewhere... so if your capital is tied up in an investment that isn't actually producing monetizable products, it's not producing capital gains. Therefore, there's a clear opportunity cost associated with putting capital some place that it's not growing in any sort of real (i.e.: liquefiable way within some predictable timeline) – and if the investment stays like that for too long, investors will go elsewhere, for greener pastures.
tatsuke95 14y ago
>"I'd say P/E ratio is a flawed metric to use when talking about what some of these new startups are worth." In other words...this time it's different! Sometimes it is, but more often than not, it isn't. >Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable That's a circular argument. The whole point is that very question: what is controlling the source of 100 million users worth? Apparently not enough that you can make money off of it at a reasonable scale.
zorked 14y ago
> A lot of the newer IPO's represent companies that have significant assets in new areas that we haven't necessarily found the most efficient monetization scheme for yet. In other words, their inflated valuations are somehow justified by the fact that there is a lot of risk involved?
ebaysucks 14y ago
Unrealized potential earnings translate into a higher P/E, they do not make the entire concept of P/E invalid. Your flawed way of thinking is exactly what prevails in a bubble.
potatolicious 14y ago
> "Pandora, for example, may not have any earnings, but the value of controlling the source of 100 million users music is no doubt quite valuable." Valuable to whom, and to the tune of how many dollars? I'll agree that some startups have the potential to be worth a lot of revenue down the line - I mean, it is how nearly all startups get off the ground. But this doesn't seem like the case here - Pandora never really saw very much revenue despite dominating the online streaming market. Their valuation was always based on an ephemeral notion of being able to monetize better some undetermined time in the future with their user base. And then Spotify and Rdio came in... so now Pandora's market share is at risk long before they ever got around to really monetizing their users. So while your point is theoretically valid, in reality 99% of the time it simply doesn't apply.
pdeuchler 14y ago
I'm not disagreeing with any of you, like I said above, simply playing devil's advocate :)

Estragon 14y ago

This confuses me. I believe Zynga has earnings, because in the comments of the OP Fred Wilson estimates their P/E at 13x ("Zynga trades at something like 13x pre-tax cash flow when you back out the $1.5bn of cash they have.") And I know Pandora has earnings, because I pay them $36/year myself.

cletus 14y ago
Revenue != earnings. Earnings = revenue - expenses It's super-important to remember the distinction.
- Estragon 14y ago
  Thanks, I understand.
moocow01 14y ago
P/Es are a little confusing... earnings by that metric really means net income or earnings per share. In other words their liabilities and costs figure into "earnings". Fred Wilson is using some wonky math there. Using projected earnings their P/E would be easily be calculated at 100+ and possibly much more. They would really have to do something out of this world to have a P/E in the teens. http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii
- fredwilson 14y ago
  here's the math. it is not wonky. market cap = ~$6bn, cash = $1.5bn, enterprise value = ~$4.5bn, pre-tax earnings/EBTIDA in Q1 = $87mm, annualized = $358mm, enterprise value/annualized ebitda = ~13
rhplus 14y ago
Forbes ran an article recently describing how some social media companies may be deferring revenues of digital purchases by classifying them as "durable goods", which could be seen as a way to make themselves more attractive as an ongoing investment. The Forbes article is quite skeptical. Worth a read: http://www.forbes.com/forbes/2012/0507/features-social-media-zyga-facebook-groupon-phony-accounting_print.html http://www.forbes.com/forbes/2012/0507/features-social-media... Your $36/year is revenue, not earnings [1]. Unless I'm misreading the numbers, both P[2] and ZNGA[3] still have yet to report a profit and establish actual ratios for P/E. [1] http://en.wikipedia.org/wiki/Earnings http://en.wikipedia.org/wiki/Earnings [2] http://finance.yahoo.com/q/ks?s=P+Key+Statistics http://finance.yahoo.com/q/ks?s=P+Key+Statistics [3] http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics

joejohnson 14y ago

Zynga has no earnings? Nasdaq lists them as having a P/E of 39 for 2011. http://www.nasdaq.com/symbol/znga/pe-ratio http://www.nasdaq.com/symbol/znga/pe-ratio Groupon's is -12, however: http://www.nasdaq.com/symbol/grpn/pe-ratio http://www.nasdaq.com/symbol/grpn/pe-ratio Where did you read that Zynga has no earnings?

moocow01 14y ago
Its probably just best to look at their financials in that there is a lot of interpretation. You can look at GAAP vs. non-GAAP and trailing and forward earnings as well as a number of other things to come to a P/E. In other words they are different depending on who is running the numbers and what metrics they are using. Probably best to come to your own conclusion... http://investor.zynga.com/releasedetail.cfm?ReleaseID=667869 http://investor.zynga.com/releasedetail.cfm?ReleaseID=667869 http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii
- joejohnson 14y ago
  You can come to whatever conclusion you like, but the fact is Zynga has earnings. Read Fred Wilson's comments in this thread if you're still confused.
  - moocow01 14y ago
    The fact is that under GAAP Zynga has had huge losses the last 2 quarters and under non-GAAP it has earnings. That is according to Zynga itself. For how the market responded to these mixed earnings figures you can look at Zynga's haircut since they announced the figures on the 27th which resulted in a drop of 10%
    - jpdoctor 14y ago
      > and under non-GAAP it has earnings. Yes, when it ignores arbitrary expenses, which are considered legitimate by GAAP, it turns a profit. Coincidently, when I ignore expenses incurred by my wife, my income also goes up considerably. Want to invest?

fredwilson 14y ago

zynga has earnings. $87mm of pre-tax cash flow in the first quarter that was just reported. Zynga has had earnings/profits/cash flow for years.

moocow01 14y ago
This is also half the story. Under GAAP, net income was -85 million last quarter and the quarter preceding it was -435 million.
jpdoctor 14y ago
> zynga has earnings. http://finance.yahoo.com/news/zynga-disappoints-again-141528576.html http://finance.yahoo.com/news/zynga-disappoints-again-141528... "Net loss was $85.0 million in the quarter compared with net income of $65.1 million a year ago." I assume you realize the point of having Generally Accepted Accounting Principles is that they are generally accepted. You could maybe create a market for VC-Accepted Accounting Principles (VAAP), but I thought that died in the first tech bubble. Apparently I was wrong.
- fredwilson 14y ago
  GAAP is nonsense. cash flow is what matters. i suggest you go look at all of those non cash charges and see if you think they are really expenses of the business.
  - lsb 14y ago
    Wait, why are generally accepted accounting practices nonsense? And, if so, why are they generally accepted? I don't know much about accounting, so this question is in earnest.
    - fredwilson 14y ago
      they are generally accepted by the accounting profession. but not by investors. investors tend to focus on cash flow. at least the smart ones do.