Posts Tagged ‘Technology’

4 Reasons Why the “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” Aren’t Really Reasons

03/29/2011

I hope that the title of the article didn’t scare you. Yet I felt compelled to share with you the same confusion many in the social media world are currently going through with regard to company valuations.

I got to the article “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” through the article “Buffett Declares Social Media Valuations Overpriced“, in which Buffett, in eerily similar fashion to the Tech Bubble 1.0, claims “it’s extremely difficult to value social networking site companies” and that “some will be huge winners, which will make up for the rest.”

As a student of investor sentiment I love to point out when investors’ hearts jump far ahead of their minds. One of my favorite books of all-time is “Extraordinary Popular Delusions and The Madness of Crowds” in which Charles McKay journeys through the greatest examples of herd-mentality people’s money has been subject to.

I’ve become quite keen of bubbles. Both finding them and pointing out false ones. Tops are more fun than bottoms, simply because bubbles are so much more entertaining.

It’s a funny thing money, because it’s something we work our whole lives for and yet it can drive us completely insane. We gamble when we have everything to lose and we shy away from the greatest of opportunities.

Back to the article.

If you insist that Facebook is worth $85 Billion today you deserve to be made fun of. Let’s begin.

Alexander Hotz is a freelance multimedia journalist and public radio junkie based in New York City. Currently he teaches digital media at Columbia University’s Graduate School of Journalism.

So now we have a case of Buffett vs Hotz. Who do YOU think is going to win? That’s right. The 80 year old investor or some young “public radio junkie”. Sorry, Alex but my money’s on Buffett.

We currently have the following valuations:

Quora $1 Billion

Twitter $10 Billion

Facebook $85 Billion

Alex mentions 4 reasons why “this time is different”.

1. Startup Costs

“[In the 1990s], when you started a company, more money was pumped into office space, servers and equipment,” said Mimeo.com Founder Jeff Stewart. “Today, when you build a company, you don’t own a server — you might even have mobile office.” With so much infrastructure now in the cloud, entrepreneurs can focus more on the product than they could in the past. For their part, investors don’t need to invest as much, so at least in comparison to the 1990s, oftentimes the risk is less. Bottom line — it costs less to start a company today.

There are 3 immediate issues I have with that paragraph.

a. It’s not true. Yes infrastructure costs have lowered significantly yet other costs and other distractions have taken its place. Today, marketing, lead generation, code writing and technical expertise have taken the front seat – aspects just as time consuming as taking out the trash or actually selling product.

b. This doesn’t help us. If startup costs have dropped that means that the incentive for other competitors to compete has risen. What stops some potential college drop-out from spending his night writing better code than your oh-so-genius team?

c. This isn’t a reason. So let us assume that you do have a patent-pending for your state-of-the-art tech-savvy game-changing app. How do you make money? If there’s no money, there’s no valuation. Period. I’ll write that again because it will recur throughout this article. If there’s no money, there’s no valuation.

2. Public vs Private

In the 1990s, tech companies raced to secure a lucrative IPO. When the bubble burst in March 2000, those who got burned weren’t just angel investors and VCs, they were less experienced investors who had jumped on the tech bandwagon.

Today, younger companies aren’t in a rush to go public. Think Facebook’s “special purpose vehicle” with Goldman Sachs. What’s more, today’s public tech companies are market stalwarts. “You can’t call Amazon or Google or Apple overvalued,” said OrganizedWisdom CEO Steve Krein. “[In the 1990s] you could have called DoubleClick, Amazon and Yahoo overvalued.”

Krein agrees with Fred Wilson that the startup world has some “frothiness” or excess capital, but comparisons to the 1990s don’t take into account where the investors are coming from.

Firstly, investors are investors. And history has proven the astute “experienced” investors to be the ones who are often the most foolish ones. You may insist that small investors won’t get burned this time and, I agree, that’s a good thing. But that doesn’t in any way validate the stupidity of the affluent who we know spend millions of dollars on other stupid stuff like art, CDOs and credit default swaps.

I have no doubt that if the small guy could get in on this mayhem, he’d buy Facebook faster than he bought Enron and Pets.com 12 years ago.

Then he mentions Google, Apple and Co., which makes my head spin. Of course Google wasn’t overvalued in 1999. It didn’t exist! So while investors were piling into Yahoo and Juno their ultimate rival wasn’t even a prototype!

The second mistake is a bit more complex. You can’t use the survivor to prove the challenge. You can’t take the 1997 Bulls and claim that the Michael Jordan draft pick was a home run. Apple has come a long way since 1999. Jobs had just joined the company again after 10 years of struggling profits and a stagnant share-price.

3. Hubris

A less tangible difference between the 1990s and today’s startups is the dynamic between the up-and-comers and the established titans. “[In the 1990s] there was a sense of confidence that the new companies would knock off the old companies,” said MeetMoi.com CEO Andrew Weinreich. “Imagine Time Warner, the most venerable of media companies, literally giving away half of itself to an Internet startup AOL. If you were in a startup, you really thought that you would knock off existing players.” Today, the big players are the survivors of the dot com era.

I have to give it to him. He had the substance of a real argument until the last line. Which survivors are we referring to? When people talk about Google being taken over by Facebook, what does that say about hubris?

Finally, since when does hubris a necessity for a valuation bubble. All we’re saying is that investor aren’t discounting anything for the future. Webster’s  defines a “Bubble” as “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

When VCs are throwing (literally) money at these new tech startups there is a definite chance of a sudden collapse in economics activity, at least in Silicon Valley.

4. The Bubble Isn’t a Profitable Joke

In 2000, entrepreneur Philip Kaplan created the satirical website FuckedCompany.com (a take on Fast Company), lampooning the absurdities of the startup world. “When you have a profitable business built around making fun of the bubble, that’s an indicator,” said Stewart. The site made some serious money off the woes of the floundering dot com world. Today, while satirical blogs and social accounts are plentiful, none of them come close to the profitability of lampooning the last bubble.

Do we really need jokes to prove investor insanity? Mind you, every child knows that (bubblegum) bubbles take time to grow, but only an instant to pop. Investors should bear in mind the same. That one day there will be a joke, the next it won’t be so funny.

So is there a bubble?

No.

Guess you weren’t expecting that answer. The fact is that if investors are going this crazy now, it’s due to continue for some time. True, there are no jokes, there are no naysayers (and thus stark advocates) and it’s not the hottest topic on CNBC. Most of all, there aren’t enough people claiming it’s a bubble (yes, a bubble needs a conscience). Not yet at least. But once the IPOs start rolling out and the small investors do get wind of what’s going on, it will end, and badly.

Wait I say.

Wait for the “Facebook taking over Apple” articles.

Wait for the momentum, when volatility increases.

Wait for the young and inexperienced investors to sit on the set of CNBC and tout the reasons for their madness.

Wait until earnings become paramount, while balance sheet quality, cash flow from operations are ignored.

Wait until these “low cost” startups begin to run low on the mountains of cash they acquired.

Wait for when the accounting seems compromised, when large amounts of earnings stem from accruals rather than cash flow from operations.

Wait for the article that say “This time is different”, “P/E ratio’s don’t matter” and “If you don’t invest now you’ll die a broke old man”.

When Buffett said that he “didn’t get tech,” he didn’t mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

Writing History

08/01/2010

“In a few hundred years, when the history of our time is written from a long-term perspective, it is likely that the most important event those historians will see is not technology, not the internet, not e-commerce. It is an unprecedented change in the human condition. For the first time, literally, substantial and rapidly growing numbers of people have choices. For the first time, they will have to manage themselves.
“And society is totally unprepared for it.”

~ Peter Drucker

Nobody’s Happy!

05/04/2009

07/18/2007
The Future of Microsoft

Enough with why Apple’s shares are overpriced. Not that they can’t go higher, but rather all the rational influences for doing so have already been priced to market. Now, expectations have to be met. If not the downside is back to 20 times earnings.

Microsoft on the other hand seems to be the quiet runner in second place. Bill Gates is not the show-and-tell that Jobs is. Thus I believe that the Microsoft the Gates and Allen have created and with the brains entailed still has some old tricks up its sleeve.

The Motley Fool says

“When your game console displays three red flashing lights, take a $1.1 billion hit?… For many companies, this would be a disaster, but for a company as large and profitable as Microsoft, it doesn’t even put a dent in our investment thesis.”

And we couldn’t agree more. The investment thesis is quite simple: Microsoft has plenty of room to run, impress investors (try impressing Apple’s shareholders) and a load of cash to do it with.

All they have to do is find the next best thing…

The Future of Microsoft

Microsoft’s “Surface” technology aims to replace the traditional computer – “a Windows Vista PC tucked inside a black table base, topped with a 30-inch touchscreen in a clear acrylic frame.”

I’m impressed.

07/10/2007
iPhone’s Fine Print

Don’t get me wrong. I have nothing against the iPhone, Jobs or Apple. As a matter of fact I think they are great products. But when shopping for a stock its a different story all together. That’s when logic seems to be deficient in certain instances.

It’s not that the iPhone will be a bad sales promoting campaign, but rather no one can say for sure that it won’t be. At this point Apple has loads to live up to. As for the shareholders in nirvana, hope itself can be a dangerous thing to bank on.

Telecom Analyst Bruce Kushnick has inspected the iPhone’s terms of service and offers some surprising revelations:

1) iPhone Requires a 2-Year Contract with AT&T.

2) Expensive: Requires $2,280, Over $1,730 in Wireless Costs.

3) Double Billing. You and the Caller Both Get Charged for the Same Call.

4) All Use of the Networks Are Always Rounded Up to the Nearest Kilobyte or Minute.

5) Customers Are Billed for “Network Errors” and “Network Overhead”.

6) Billed Even Though the Call Doesn’t Go Through.

7) Bogus Fees Added to the Bill: Regulatory Cost Recovery Charge

8) $175.00 Termination Fee.

9) International Messages Are Charged Additional Fees as Are Files Over 300Kbps.

10) Over Your Quota: Get Gouged: 40¢ Per Minute and 69¢ Roaming Offnet.

11) The Services Are Not Secure and Can’t Block Your Phone Number.

12) The Current Mobile Email Service Doesn’t Support Attachments.

13) Prohibited Uses and “Unlimited” Sales Hype. You can’t use the service for VOIP and worse “unlimited plans cannot be used for uploading, downloading or streaming of video content (e.g. movies, tv), music or games.”

14) Service Is Not Intended to Provide Full-Time Connections: Unlimited is Hype – Don’t use the service too much or the phone company can terminate your service.

15) Wi-Fi Service is Limited – “To ensure that the Wi-Fi Service is not being used fraudulently, AT&T limits your usage of the Wi-Fi Service to 150 uses per month” Does that mean that if you lose signal a few times during one session, or you are traveling and go between ‘hot spots’ you can rack up lots of ‘uses’?

16) “Offnet” Restrictions – If you have a service and you happen to call other ‘offnet’ services, including wireline phones, or non-AT&T subscribers, you have to ‘limit’ your use, be charged or be terminated.

17) Plan Goobly-gook – …There are plan fees, taxes and surcharges, roaming fees, text fees, Night and Weekend Minutes, Mobile to Mobile Minutes, Anytime Minutes and Rollover Minutes, EDGE/GPRS and BroadbandConnect, offnet, AT&T Video clips, Data Connect Unlimited, WI-FI CONNECT, constraints on ‘unlimited plans including “20% of 6 Megabits offnet”, “150 uses of Wi-Fi”, and other restrictions…

18) Comparing US and Other Broadband Countries: America Is being Laughed At.

Why did iPhone get deployed on a slow, closed network? That answer may not be known, but it is clear that iPhone is being deployed on an old-technology network, and is neither state-of-the-art nor fast. Here’s some info about the [wired] networks… “The median U.S. download speed now is 1.97 megabits per second — a fraction of the 61 megabits per second enjoyed by consumers in Japan … Other speedy countries include South Korea (median 45 megabits), France (17 megabits) and Canada (7 megabits).”

19) The Upcoming Wireless Spectrum Auctions – The upcoming 700 MHz wireless spectrum auctions are underway [and] the bottom-line is [that] America needs open wireless networks, and it should be clear to anyone who is considering buying an iPhone that the AT&T networks should not be the only network for this innovative product.

Now I’m sure many other plans have many of the above restrictions and then some, the point is though… If you’re thinking of buying the iPhone read the fine print.

07/09/2007
I Can’t Help But Wonder…

Ford Reconsiders Electric Car“. It still amazes me how such large and (once) dominant corporations miss the greatest opportunities. Bill Gates predicted that one day we’ll be selling music online, but then lost the market to Apple’s iTunes. Where have they been?

Funny how when you buy value while dollar-cost-averaging you want whatever it is you are buying to go up and down at the same time. Better to trust your instincts that your purchase is correct and just keep buying for as low as possible.

It’s not inflation and deflation of assets that makes things so complicated. It’s the dollar. So you might as well just get rid of the dollar altogether and only deal with real inflation, no?

With all the hype surrounding Apple and no pizazz whatsoever involving Microsoft, wouldn’t a spread between the two stocks sound like a good idea?

Will this bubble slowly deflate like a bad tire, or will it pop like “OMG WTF just happened to all my money!”?

Will silver be following suit with nickel, when large institutions attempted to corner the market through hoarding the metal and watching prices rise as demand was not met? If it is, “Watch out longs”.