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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 repr

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 15y 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 15y 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 15y 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 15y 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 15y 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 15y 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 15y ago
I'm not disagreeing with any of you, like I said above, simply playing devil's advocate :)

moocow01 15y 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 15y 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 15y 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 15y 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 15y 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 15y 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 15y ago

I'm not disagreeing with any of you, like I said above, simply playing devil's advocate :)