4 ms·

"This year, shares of newly public technology companies are being valued at 5.6 times sales, estimates University of Florida professor Jay Ritter, who tracks IP

by pg 13y ago

"This year, shares of newly public technology companies are being valued at 5.6 times sales, estimates University of Florida professor Jay Ritter, who tracks IPOs. That is well short of the median of 26.5 times sales in 1999." At least the WSJ feels obliged to put facts in their articles, even if they contradict the headlines.

hnal943 13y ago
The article and the headline are typically written by different people anyway, so this title-article dissonance is certainly possible.
7Figures2Commas 13y ago
1. Pick an arbitrary financial ratio. 2. Compare today's median value at IPO to median value at IPO in 1999. 3. If today's median value is less than 1999's median value, there cannot be a bubble. Interesting approach, but one that I would inevitably expect to create more pain than profit.
- pg 13y ago
  Except that's not what they did. They looked at what's probably the most meaningful ratio, and they found that it's not merely lower but around 5x lower. (This sort of comment is a good illustration of a problem with forums, incidentally. Once a forum has users who reply by mischaracterizing what you say, every comment is twice as much work. First you say what you want to, and then you have to make another comment saying in effect "no, what I said was...")
  - 7Figures2Commas 13y ago
    > They looked at what's probably the most meaningful ratio... Says who? While price-to-sales can be a very useful metric, I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued. And using the median value of this ratio at IPO alone with a small subset of companies in an effort to argue for or against the notion that there's a "bubble"? That's simply not credible. For what it's worth, if you do want to look at price-to-sales, and in a more meaningful context, it's worth considering that the median price/sales ratio in the US markets is at a record high and exceeds the mean by a near record margin as well[1]. [1] http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/10/AE%20Price%20Sales%20Median.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
    - wtvanhest 13y ago
      "I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued." Despite the fact that the most knowledgeable people in finance and business management widely agree that the most rapid growth cannot take place in a company also turning out maximum profit, HN participants still continually demand profit be the most important metric. Profit is not the most important metric, and never will be for growth companies. In fact, if you use profit ratios as your metric for growth companies, you will be wrong 100% of the time. Not just sometimes, 100% of the time. Price/Sales is a great ratio to use and in most cases probably is the most meaningful ratio. Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. That US Price/Sales ratio you quoted also includes highly profitable, but non-growth companies like utilities and other old businesses. Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
      - 7Figures2Commas 13y ago
        > HN participants still continually demand profit be the most important metric. That may or may not be true, but nothing in my comment suggested this was the case. In fact, if you argued that the price-to-earnings ratio was the most meaningful metric for investment and trading decisions, my response would be the same: it can be very useful, but alone it can get you into a lot of trouble. Nobody experienced is investing/trading off of a P/E comparison that takes a fraction of a minute. > Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. Trying to understand a subsection of the market without understanding the broader market is a recipe for disaster. This is especially true in today's market. For clarity: 1. There are companies that deserve premium valuations. Some of these are tech companies. 2. The Fed is driving the market today, so valuation is very, very difficult. 3. Folks who believe there are publicly-traded companies that haven't been impacted by QE and that aren't vulnerable to major moves in either direction based on changes in monetary policy are going to be hammered. > Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed. I don't completely ignore fundamentals but I trade primarily off technicals so I'm afraid I'm not going to impress you. That said, I would offer the observation that anyone who looks at trendlines has probably made a lot more money with far less effort over the past several years than folks who are obsessed with fundamentals.
  - seiji 13y ago
    (See http://dilbertblog.typepad.com/the_dilbert_blog/2007/04/my_new_favorite.html http://dilbertblog.typepad.com/the_dilbert_blog/2007/04/my_n... — "I’ve noticed that a lot of people, if not most, have sharp disagreements with what they hallucinate to be my opinions.")
nextstep 13y ago
How exactly does that contradict the headlines: "Silicon Valley: Feel the Froth: Tech Valuations Stir Memories of 1999, but There Are Some Differences"?
- the_watcher 13y ago
  I guess if the indicator they are suggesting they are using is at 1/5 of the bubble, that means it stirs memories? "Tech Valuations Stir Memories of 1999, but There Are Some Differences" is actually the subtitle, not the headline.
- thatthatis 13y ago
  5.6 times revenue is a fairly cheap price for a fast growing company (historically, on the average, ceteris paribus) For example, P&G is currently trading at about 3 times revenue.
  - adventured 13y ago
    One of the problems with that 5.6 number, is how tilted down it is by larger slower growth companies carrying much lower ratios. Some examples: Facebook: 20 | Workday: 40 | LinkedIn: 27 | Yelp: 30 | Pandora: 9 | RetailMeNot: 12 | Salesforce: 10 | Splunk: 25 | Rocket Fuel: 15 | HomeAway: 8 | Baidu: 15 | Priceline: 10 | Sina.com: 10 | Youku: 11 Twitter: 15? ($650m in expected sales or whatever, $10b assumed valuation) So is there a bubble in a certain class of tech companies? I think frothy is the right word for now. The valuations are clearly very high, but not 1999 high. Right now it reminds me a lot more of 2005 > 2007.
    - thatthatis 13y ago
      Data source? What are their growth rates?
thatthatis 13y ago
I do appreciate that they're using the term froth instead of "bubble". But froth just seems to be a new term for "the IPO cycle is starting up." There is an IPO cycle. Big proven companies go public (Facebook, twitter), then smaller less proven companies go public (next year), then (on the appetite for ipo returns) junk starts going public and then the junk crashes and investors sour on IPOs for five to ten years before another big proven company starts the cycle again. This exact phenomenon was discussed in Benjamin Graham's "intelligent investor" from the 1940s. Sophisticated VCs I know talk about this as IPO windows, and openly discuss whether a company can make it public in this window or will have to wait for the next.
jacques_chester 13y ago
IMO the sample is skewed by the fact that companies nowadays only rarely go to IPO. In the 90s even the shitty companies went to IPO. Their shittiness inflated the PE figures. Nowadays shitty companies don't go to IPO. They fail silently, bought out by some other company or just shuttered without warning. The easiest exit now is to sell to one of Facebook, Google, Microsoft or Apple. Retail investors don't get burnt, so almost nobody in the mass media cares. Professional investors generally don't advertise their cockups, so life goes on in blissful ignorance. Because these companies don't go to IPO, there's no public data on their performance. So in fact the current bubble could be as bad, or indeed worse, and there's no way to tell because the data point being used (PE for post-IPO companies) is not based on comparable samples. I think that the data on the SF housing market might be a better indicator of how much money is chasing tech right now, since that's a major sink for it.
- netcan 13y ago
  Aren't those things signs of health? Shitty companies not going public, shitty companies failing silently, retail investors not getting burned, professional investors in high risk ventures taking the big losses.
  - jacques_chester 13y ago
    We don't know whether they're healthy, because we can't compare the samples.
utnick 13y ago
I would be interested in seeing the list of tech companies this stat is based off of. 5.6 seems really low to me seeing that FB, zynga, linkedin are all valued at hundreds of times sales. Guessing these tech companies are not consumer software companies, but maybe hardware / manufacturing companies or something
- adventured 13y ago
  I posted a few examples above (Facebook has a 20), but Zynga actually isn't a good reference for a high number. It has a trailing four quarters sales to valuation ratio of 3 ($1b in sales, $3b in market cap). And despite Zynga's significant problems, they're sitting on $1.1b in cash stacked against that market value. If they're careful they can probably lose money for a decade and stick around. Other surprisingly low examples: Groupon (3), and Angie's List (their stock crashed recently, but it's now a 4).

by pg 13y ago

hnal943 13y ago

The article and the headline are typically written by different people anyway, so this title-article dissonance is certainly possible.

7Figures2Commas 13y ago

1. Pick an arbitrary financial ratio. 2. Compare today's median value at IPO to median value at IPO in 1999. 3. If today's median value is less than 1999's median value, there cannot be a bubble. Interesting approach, but one that I would inevitably expect to create more pain than profit.

pg 13y ago
Except that's not what they did. They looked at what's probably the most meaningful ratio, and they found that it's not merely lower but around 5x lower. (This sort of comment is a good illustration of a problem with forums, incidentally. Once a forum has users who reply by mischaracterizing what you say, every comment is twice as much work. First you say what you want to, and then you have to make another comment saying in effect "no, what I said was...")
- 7Figures2Commas 13y ago
  > They looked at what's probably the most meaningful ratio... Says who? While price-to-sales can be a very useful metric, I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued. And using the median value of this ratio at IPO alone with a small subset of companies in an effort to argue for or against the notion that there's a "bubble"? That's simply not credible. For what it's worth, if you do want to look at price-to-sales, and in a more meaningful context, it's worth considering that the median price/sales ratio in the US markets is at a record high and exceeds the mean by a near record margin as well[1]. [1] http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/10/AE%20Price%20Sales%20Median.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
  - wtvanhest 13y ago
    "I don't know any experienced market participant who invests or trades off of fundamentals who would argue absolutely that price-to-sales is the most meaningful ratio off of which to determine whether a company is undervalued, overvalued or fairly valued." Despite the fact that the most knowledgeable people in finance and business management widely agree that the most rapid growth cannot take place in a company also turning out maximum profit, HN participants still continually demand profit be the most important metric. Profit is not the most important metric, and never will be for growth companies. In fact, if you use profit ratios as your metric for growth companies, you will be wrong 100% of the time. Not just sometimes, 100% of the time. Price/Sales is a great ratio to use and in most cases probably is the most meaningful ratio. Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. That US Price/Sales ratio you quoted also includes highly profitable, but non-growth companies like utilities and other old businesses. Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed.
    - 7Figures2Commas 13y ago
      > HN participants still continually demand profit be the most important metric. That may or may not be true, but nothing in my comment suggested this was the case. In fact, if you argued that the price-to-earnings ratio was the most meaningful metric for investment and trading decisions, my response would be the same: it can be very useful, but alone it can get you into a lot of trouble. Nobody experienced is investing/trading off of a P/E comparison that takes a fraction of a minute. > Additionally, the medium price/sales ratio for the entire market has little to do with an ultra small subset of technology companies IPOing. Trying to understand a subsection of the market without understanding the broader market is a recipe for disaster. This is especially true in today's market. For clarity: 1. There are companies that deserve premium valuations. Some of these are tech companies. 2. The Fed is driving the market today, so valuation is very, very difficult. 3. Folks who believe there are publicly-traded companies that haven't been impacted by QE and that aren't vulnerable to major moves in either direction based on changes in monetary policy are going to be hammered. > Just consider the BCG growth matrix for a few hours, think about how companies work, then come back and suggest a better metric than price/sales. If you come up with something smarter than that, I will be really, really impressed. I don't completely ignore fundamentals but I trade primarily off technicals so I'm afraid I'm not going to impress you. That said, I would offer the observation that anyone who looks at trendlines has probably made a lot more money with far less effort over the past several years than folks who are obsessed with fundamentals.
- seiji 13y ago
  (See http://dilbertblog.typepad.com/the_dilbert_blog/2007/04/my_new_favorite.html http://dilbertblog.typepad.com/the_dilbert_blog/2007/04/my_n... — "I’ve noticed that a lot of people, if not most, have sharp disagreements with what they hallucinate to be my opinions.")

nextstep 13y ago

How exactly does that contradict the headlines: "Silicon Valley: Feel the Froth: Tech Valuations Stir Memories of 1999, but There Are Some Differences"?

the_watcher 13y ago
I guess if the indicator they are suggesting they are using is at 1/5 of the bubble, that means it stirs memories? "Tech Valuations Stir Memories of 1999, but There Are Some Differences" is actually the subtitle, not the headline.
thatthatis 13y ago
5.6 times revenue is a fairly cheap price for a fast growing company (historically, on the average, ceteris paribus) For example, P&G is currently trading at about 3 times revenue.
- adventured 13y ago
  One of the problems with that 5.6 number, is how tilted down it is by larger slower growth companies carrying much lower ratios. Some examples: Facebook: 20 | Workday: 40 | LinkedIn: 27 | Yelp: 30 | Pandora: 9 | RetailMeNot: 12 | Salesforce: 10 | Splunk: 25 | Rocket Fuel: 15 | HomeAway: 8 | Baidu: 15 | Priceline: 10 | Sina.com: 10 | Youku: 11 Twitter: 15? ($650m in expected sales or whatever, $10b assumed valuation) So is there a bubble in a certain class of tech companies? I think frothy is the right word for now. The valuations are clearly very high, but not 1999 high. Right now it reminds me a lot more of 2005 > 2007.
  - thatthatis 13y ago
    Data source? What are their growth rates?

thatthatis 13y ago

I do appreciate that they're using the term froth instead of "bubble". But froth just seems to be a new term for "the IPO cycle is starting up." There is an IPO cycle. Big proven companies go public (Facebook, twitter), then smaller less proven companies go public (next year), then (on the appetite for ipo returns) junk starts going public and then the junk crashes and investors sour on IPOs for five to ten years before another big proven company starts the cycle again. This exact phenomenon was discussed in Benjamin Graham's "intelligent investor" from the 1940s. Sophisticated VCs I know talk about this as IPO windows, and openly discuss whether a company can make it public in this window or will have to wait for the next.

jacques_chester 13y ago

IMO the sample is skewed by the fact that companies nowadays only rarely go to IPO. In the 90s even the shitty companies went to IPO. Their shittiness inflated the PE figures. Nowadays shitty companies don't go to IPO. They fail silently, bought out by some other company or just shuttered without warning. The easiest exit now is to sell to one of Facebook, Google, Microsoft or Apple. Retail investors don't get burnt, so almost nobody in the mass media cares. Professional investors generally don't advertise their cockups, so life goes on in blissful ignorance. Because these companies don't go to IPO, there's no public data on their performance. So in fact the current bubble could be as bad, or indeed worse, and there's no way to tell because the data point being used (PE for post-IPO companies) is not based on comparable samples. I think that the data on the SF housing market might be a better indicator of how much money is chasing tech right now, since that's a major sink for it.

netcan 13y ago
Aren't those things signs of health? Shitty companies not going public, shitty companies failing silently, retail investors not getting burned, professional investors in high risk ventures taking the big losses.
- jacques_chester 13y ago
  We don't know whether they're healthy, because we can't compare the samples.

utnick 13y ago

I would be interested in seeing the list of tech companies this stat is based off of. 5.6 seems really low to me seeing that FB, zynga, linkedin are all valued at hundreds of times sales. Guessing these tech companies are not consumer software companies, but maybe hardware / manufacturing companies or something

adventured 13y ago
I posted a few examples above (Facebook has a 20), but Zynga actually isn't a good reference for a high number. It has a trailing four quarters sales to valuation ratio of 3 ($1b in sales, $3b in market cap). And despite Zynga's significant problems, they're sitting on $1.1b in cash stacked against that market value. If they're careful they can probably lose money for a decade and stick around. Other surprisingly low examples: Groupon (3), and Angie's List (their stock crashed recently, but it's now a 4).