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In Some Ways, It's Looking Like 1999 in the Stock Market
- subdane 13y agoRelevant quote, "The point is that even if prices are high in the overall market, they are being backed up by earnings to a much larger extent than in 2000. That’s important, because back then, when the dot-com bubble burst, the downdraft brought most companies down with it."
- scrollaway 13y agoGood article but the bit about Oculus VR was way out of place. You're going to put Candy Crush, a mobile match-three game valued at $7B, with a company producing top of the line VR hardware and legends of the 3d industry on its staff that sold for $2B?
- acd 13y agoEconomist believe in the free market as long as its not the price of new money ie the interest rate. Then most economists believe in that a central planned system is better via central banks. That is strange to promote that the free market is best in one way but not pricing another goods. I think that central banks manipulation of the interest rates are creating the boom and bust cycles. Like Hayek and Austrian economics. When the price of new money is wrong it will be wrongly allocated which in turn creates economic bubbles.
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- hibikir 13y agoPurely private money doesn't really work so well, because you can't really believe it'll be worth anything tomorrow. Now, what the Austrians have right is that overly out of whack money supply is pretty bad, and no central body can really do that good a job at guessing right. But instead of throwing the baby with the bathwater, what can be done is to give the fed a mandate that directly lines up with something we want. For instance, we could have a fed that alters the money supply looking straight at NGDP. A stable NGDP growth is extremely valuable, as it's the best approximation we have of economic health. So if the Fed targetted NGDP growth, and used markets due to their forward looking nature, we'd get a better policy overall, without really risking the instability that comes from having money that can't really be trusted.
- voodoomagicman 13y agoThe thing is there is not a clear way to have a market control the creation of new money - the choice is between central control of the money supply and a fixed money supply.
- Tycho 13y agoI wouldn't say that - private banks create new money whenever they issue loans (ie. all the time).
- skybrian 13y agoCentral banks do control interest rates and the reason this is done is to try to dampen boom and bust cycles. However, there's no right or wrong price of money. A price that's good for most of the "real" economy (seen in unemployment rates) is not so good for deflating speculative investments. Similarly, a price that's good for Germany is not good for Spain. Letting the market decide the price will choose a price. Whether it's the right price depends on your perspective. There's no reason it has to be the right price or even a stable price; see Bitcoin for example.
- hnnewguy 13y ago>I think that central banks manipulation of the interest rates are creating the boom and bust cycles. Boom and bust cycles have happened throughout human economic history, well before central banks. Take a look at the FRED data on recessions and tell me if the economy avoided such fluctuations pre-Fed.
- notastartup 13y agoMarkets can remain irrational longer than you can remain solvent.
- refurb 13y agoI don't think it's fair to lump the biotech firms in with the tech stocks. Biotech firms are different for a few reasons. Biotech firms have a very long lead time before getting FDA approval and can start making money. Therefore, it shouldn't be unusual that they are showing a loss each year. You can't create a MVP for a drug and starting selling it. Second, the value of biotechs is firmly linked with IP. If the drug works, no one else can sell it until the patent runs out (usually 8-10 years after FDA approval). The valuations you see are not based on current revenue/profit, but rather potential revenue/profit once approval happens. Tech companies don't really have the benefit of IP that biotech companies have (someone can make an AirBnB knock-off and there is nothing AirBnB can do about it). That said, I think the biotech stocks are getting really high valuations lately. There is a TON of risk in biotech stocks. If you're drug has bad side effects, you might not get approval and future revenue = $0. Not quite the same as tech stocks where you can still enter the market, you might not do as well as you thought, but you still get some revenue.
- waterlesscloud 13y agoPart of the issue with biotech is that it costs so much to fail. Companies have to spend massive amounts of money just to find out an idea isn't going to work.
- refurb 13y agoI don't disagree. For the most part biotech investment outcomes are binary. You either win or you lose (there are some exceptions). And since it typically costs $5-10M just to be able to test your drug in the first human, when biotechs fail, they fail hard.
- quaunaut 13y agoI really have a hard time understanding these arguments. There are some good examples out there of difficult-to-understand buys and misunderstood valuations- there's no way the WhatsApp purchase is ever going to recoup its costs(the userbase is irrelevant, at a $1 per year price it just isn't gonna happen, especially considering the WhatsApp founders claimed they weren't going to be charging any more than that or for many other services they wanted to provide, AND that they wouldn't have ads), King.com is just this year's Zynga(news to the tech investment scene: The games industry is not nearly as simple as you seem to think it is), and there's no shortage of questionable investments in smaller companies, to be sure. But then, you use examples like Airbnb and Oculus as an example of tech industry madness? "Airbnb is like a hotel chain without the hotels." Yeah. That means they absolve themselves of costs, growth time, investment into that growth, location issues, the works. They hacked the concept of a hotel, and found the holy grail for that market space. Frankly, if you think $10 billion is a ridiculous number, with them being worth more than Hyatt- I'd be inclined to wonder what holds them back being worth 3 Hyatts. They've got momentum, they've got product, and they've got the community. Short of the possibility of some grand competitor actually coming in and doing a bangup job, I think Airbnb's potential is at least an order of magnitude higher than this. And Oculus- so they have little revenue now? They have decent revenue at all for a product that has only been released to developers. You even admit that VR can completely change the world, but don't do the homework to understand they're probably less than 2 years from a product release with massive community and business support? What, did your deadline come up and you just had to submit? Look, it's fine if you think either are overvalued. But trying to use either in your examples for how we're in a 1999-style bubble is laughable. You hand us two of the best reasons we're not in a bubble and wonder why everyone thinks we're not. Really now?
- FollowSteph3 13y agoYou used the keyword here of a bubble. Potential versus realized revenues and profits ;)
- angrybits 13y agoNo, it's the keyword of an investment. You're trying to grow your capital by investing in companies that you expect to grow in value. It's all about potential.
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- kqr2 13y agoOT: is there a good HN like forum for discussing finance? Old timers will remember newmogul.com, however, that's defunct.
- emp_ 13y agoboredbanker.com/news was mentioned here a few days ago, but seems down to me.
- coldcode 13y agoThe problem with finance related discussion forums is they wind up being used to generate fake information to try to drive pump and dump stocks. It's hard to keep them clean.
- tim333 13y agoI don't know of a HN type site but seekingalpha.com is quite good for info. edit - I had a look to see if they had mentioned this article - not as far as I can tell but there was a similar thing from a year back. Discussion a bit lame but better than nothing IMHO http://seekingalpha.com/instablog/5760541-tales-from-the-future/2092252-new-tech-bubble-fast-approaching-this-feels-like-1998-again-is-1999-soon-ahead http://seekingalpha.com/instablog/5760541-tales-from-the-fut...
- tpeng 13y agoThere's a big difference between the dot-com IPOs of the late 90s and the IPOs of today: revenues. Some may express surprise that Candy Crush generated $1 billion of revenue, or that Facebook generates $8 billion / yr; and some may not agree with the multiples assigned to these companies by the markets; but neither of those thoughts makes the current environment comparable to 1999, when pre-revenue companies with unworkable business plans IPO'ed at high valuations. What I don't see in this article is any analysis of the growth potential, long-term margins, and defensibility that these businesses possess. That kind of analysis is crucial to a valuation discussion.
- MichaelGG 13y ago>when pre-revenue companies with unworkable business plans IPO'ed at high valuations. Twitter? Or Splunk?
- TheCoelacanth 13y agoTwitter had $422 million in revenue in the three quarter before its IPO. Splunk had $121 million in revenue the year before its IPO. Both were running at a loss, but they did both have a considerable amount of revenue. That puts them way ahead of many of the companies from the dotcom bubble since they at least have a proven way of bringing in money, even if it isn't enough to fully cover their expenses.
- MichaelGG 13y agoI apologize, that was a reading comprehension fail and I read pre-profit.
- ritwikt 13y agoAirBnB and Oculus create value one by disruption and the other by innovation ... They are better left off from King lane which is more ephemeral .. '99 was more of a tide where everything rose - look @ how King got punished in the market, would that have happened in '99?
- capkutay 13y agoIt depends how you look at it. If you're comparing 2 line charts, tech stocks in 1999 versus now with no other contextual information, then yes it looks like 1999. Otherwise, the new wave of tech companies are leaders in highly competitive markets and have some significant revenue stats to prove it. I would only start to get worried if a company like Box had a wildly successful IPO with ~$160m in losses, technology thats relatively easy to make, and lots of competition coming from the industry giants. That would seem bubbly to me.
- owensims1 13y agoHe did a good job of negating the entire first half of the article by showing that P/E ratios are totally reasonable, especially compared to 1999.
- gone35 13y agoWell while it is clear the P/E ratios today are on average much lower than during the dot-com bubble, they are still high enough in some cases to warrant taking a closer look at whether they are 'reasonable', I think. For instance although King.com has a P/E ratio at launch of around 10 and many other top stocks like Google and Apple have P/Es below 30, Facebook currently has an estimated P/E ratio (ttm) of 101.7 [1]; Netflix, Amazon and LinkedIn clock in at 213, 612 and 941 as of last February; and Twitter has a negative P/E ratio of -10 or so, having lost $645 million in 2013 [2]. Not a clear picture by any means, but it is fair to ask if all these valuations are reasonable. [1] http://www.bloomberg.com/quote/FB:US http://www.bloomberg.com/quote/FB:US [2] http://www.newyorker.com/online/blogs/johncassidy/2014/02/which-internet-stock-is-the-most-overvalued.html http://www.newyorker.com/online/blogs/johncassidy/2014/02/wh...
- Tycho 13y agoFirst, investment pours into companies with users and revenue. The next stage it's companies with users but no revenue. The final stage is companies with no revenue and no users. It's the Minsky-moment updated for the internet age. (first people take out loans they can afford to pay back; then loans where they can only afford to pay the interest; then finally people start taking out loans where they can afford neither the interest nor the principal payments)
- friendcomputer 13y agoIts worth pointing out that due to Sarbanes-Oxley, some of this will not happen on the stock market this time. So if you are just looking at P/E of publicly traded stocks you are going to miss the signs.
- EGreg 13y agoWhenever people criticize the market valuations, shouldn't Laissez Faire advocates say, "the market is always right?" There is something they don't know.
- jweir 13y agoThe article makes no mention of quantitative easing. I think that has a bit of an effect of the stock market I general, not just tech IPOs. So, I don't think this market is anything like 1999, this is very different.
- raverbashing 13y agoYes, QE made it different. Made it worse
- kzrdude 13y agoQE without funding welfare is dangerous. Increased consumption would benefit everyone with more money flowing through the whole society. Yes it avoids inflation this way, but I think it solidifies the power and wealth gap. We keep the financial sector running, while we forget that the financial sector serves not itself, but really the rest of us: it exist to provide funds efficiently where it is most needed for our development.
- leoc 13y agoWeren't there similar, though less dramatic circumstances in 1999 too though? ISTR that Alan Greenspan lowered interest rates in order to help fight the LTCM fire.
- mikecb 13y agoThat was in 1997 though. As was the Asian crash and Russia default (which partly caused LTCM), so there are plenty of other reasons for the Fed action.
- MisterMashable 13y agoDuring the 90s internet stocks were doubling or tripling in a matter of days. That isn't happening now. This market is very frothy but this most certainly isn't 99. That said, the market can go anywhere. The market could be topping right now and on it's way to DOW 5000, or it could be taking a break then go merrily on it's way to DOW 35,000. It doesn't matter what Schiff says, it doesn't matter what the cheerleaders say. The market will do its own thing.
- mpg33 13y agoI think it's important to distinguish between general stock market and tech stocks.
- encoderer 13y ago...But in most ways it's not.
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- cookrn 13y agoIt's a small nitpick about the article, but I found it hard to continue reading when the author called WhatsApp "a social media company with modest sales".
- richardlblair 13y agoThe thing that should scare you all, is that this article isn't wrong. If you argue that it is wrong, than I'm sorry, but you aren't seeing things clearly and this is going to hurt you most. If you are making a good wage in this industry, put some away for when shit hits the fan. It's not a matter of if, it's a matter of when. Be prepared, friends, because shit is going to go down.
- thro2 13y agobogus article, best accompanying photo ever.
- adventured 13y agoIn some ways it's far worse than 1999. The Russell 2000 has a 75 pe ratio (a year ago it was 35).
- paulbaumgart 13y agoP/E is a useless metric for high-growth industries.
- adventured 13y agoI wasn't aware that all the companies in the Russell 2000 were high growth. I was under the impression they're small caps, which has nothing to do with growth rate. A doubling of the PE over the course of one year is not a useless metric in fact. It means you're paying twice an already extreme price for the growth you get, compared to last year.
- paulbaumgart 13y agoCompanies that have a strong vision for how to turn their cash into growth should not have profits.
- paulbaumgart 13y agoI think the key point they're missing is that most tech goes through a "hype cycle" of unreasonable expectations followed by a crash followed by slow, steady, solid growth[0]. That's the same trend at play here: it's not that the dotcom-bubble ideas were categorically idiotic, it's just that many were premature and overhyped. Now, a lot of those ideas are being done right, and people with a weak grasp on the underlying tech can't tell the difference. 0. http://en.wikipedia.org/wiki/Hype_cycle http://en.wikipedia.org/wiki/Hype_cycle
- steven2012 13y agoIf you think that today's stock market is like 1999, then you weren't around to see the utter madness that was the stock market during the dot com days. It was sheer insanity how crazy stocks were being bid up. Absolutely valueless companies were bid up 10x by day traders. There was zero sense of fundamentals, and fraud was rampant everywhere. The company I worked for went bankrupt due to financial fraud and many of my coworkers lost hundreds of thousands to millions of dollars. Right now, we have essentially 2 companies, Google and Facebook, that are throwing billions upon billions of dollars worth of shareholder money to seemingly stupid ideas. And while I'm sure there's still plenty of fraud, you don't have anywhere near the same level of fraud as you did back during the dotcom days. I truly do believe that most companies and more especially CEOs are a lot more cognizant that they will go to jail for financial fraud if they step over the line, so they are a lot cleaner than they were 15 years ago, for the most part.
- jipy9 13y agoYou'll may have seen this, since this is a bit old now. But, the quality, lucidity, and accessibility of this piece makes it worth another read. Aswath Damodaran, NYU Stern Professor of Finance has a great piece here on Whatsapp pricing - http://aswathdamodaran.blogspot.in/2014/02/facebook-buys-whatsapp-for-19-billion.html http://aswathdamodaran.blogspot.in/2014/02/facebook-buys-wha...
- matco11 13y agoThe reference to the AirBnB valuation is completely misplaced: The best rated hotel chains don't own the real estate. Furthermore the ubiquitous coverage that AirBnB offers is unmatched by any hotel chain. The current valuations reflect the perfectioning of business models and practices since the nineties. Everybody has learned a lot since. It's not like 1999. This feels more like 1998.
- TheCoelacanth 13y agoAirBnB only targets one of the major segments of hotel business. AirBnB almost exclusively focuses on the consumer market. Hyatt, the example from the article, focuses primarily on other segments, business travelers and meetings and groups. AirBnB has the potential to take away most of the consumer segment, but they don't have much appeal to most of Hyatt's customers.