Daniel Gross, who wrote an, uh, ill-timed book in 2007 extolling the benefits of bubbles, did make an interesting point the other day about the various stages of bubble formation:
… a few solid years of impressive fundamental growth give way to highly ambitious projections and world-changing proclamations; a host of new entrants run onto the field, oblivious to profits or many of the other basics of running a business; individuals and naïve corporations start to get in on the action with bold, aggressive moves; and in the most dangerous stage, the phenomenon crosses over into popular culture—i.e. from CNBC to NBC.
And right on cue, here comes USA Today touting IPO jumps (“GrubHub IPO jumps a tasty 31%”) and talking about metrics created by Silicon Valley (see: adjusted earnings before interest, taxes, depreciation, and amortization) that magically turn losses into profits not recognized by Generally Accepted Accounting Principles.*
Which brings us to another recent headline, this time in Fortune:
Tech IPOS: Profits don’t matter
Fortune here writes about Box, a cloud-storage company that filed for an IPO two days before Slate’s piece and which spends more on marketing than it reaps in sales. Fortune writes that investors are only focused on growth and “total available market” and that:
… my overarching point remains: Profits do not decide a company’s success or failure in the public markets. If they did, growth-focused Amazon wouldn’t be trading at more than $350 per share.
The Amazon example also is instructive for one other reason: Many of these tech issuers — particularly the enterprise tech ones — could be profitable if it was somehow required. They’d probably shrivel up and eventually die, but it technically could be done (as opposed to investing into future growth). This is a key difference between today’s tech IPO market and the dotcom boom — where many of the frothiest companies had no underlying business to fall back on if times got lean. You may disagree with the notion of revenue growth trumping profitability — and it’s a near certainly that valuations will eventually fall, leaving many tech IPO investors with losses — but at least today’s buyers are looking at those metrics, instead of something like “eyeballs.”
But there’s a bit of a disconnect here. What does it say about a company’s value that it is unable to make profits, and that any changes required to generate profits would rob it of investment capital and eventually cause it to shrivel up and die? That’s different from the late 1990s in that profits are at least theoretically possible, I suppose, even if only temporarily. But still, that’s a long way from reasonable valuations based on expected future earnings.
No two bubbles are the same and you’d be hard-pressed to top the one we saw in the 1990s, much less the housing bubble of the 2000s.
Back in 1999, we had not just unsustainable valuations but the wild-eyed cheerleading that purported to justify them, including the infamous Dow 36,000, where American Enterprise Institute think-tankers said stocks were undervalued by two-thirds and that P/E ratios would be fairly valued at 100.
But even they had nothing on Wired founding editor Kevin Kelly, who in September 1999 wrote perhaps the most insane piece of the entire dot.com bubble. Kelly wrote that the Dow would be above 50,000 by 2010, a prediction that was off by 40,000 points or so.
It’s fascinating in retrospect to see how aware Kelly is of the craziness he’s amidst but how he’s able to brush it off:
The beginning of every previous boom has hatched prophets claiming that “this time is different.” Immediately after these claims are made, the market crashes. But sometimes, things really are different.
And so he predicted:
Fast-forward to 2020. After two decades of ultraprosperity, the average American household’s income is $150,000, but milk still costs only about $2.50 a gallon. Web-enabled TVs are free if you commit to watching them, but camping permits for Yellowstone cost $1,000. Almost everyone working has signed up for a job that does not exist (at the moment); most workers have more than one business card, more than one source of income. Hard-hat workers are paid as much as Web designers, and plumbers charge more for house calls than doctors. For the educated, the income gap narrows. Indeed, labor is in such short supply that corporations “hire” high school grads, and then pay for their four-year college educations before they begin work.
What the rich have in the year 2000, the rest have in 2020: personal chefs, stay-at-home moms, six-month sabbaticals.
As best as I can tell, we’re not seeing anything quite like this yet. It may in fact, be impossible to be wronger than Kevin Kelly was 15 years ago.