I notice that several companies discussed on this board involve “the cloud” in some fashion or another.
I don’t know whether these are considered tech companies, but what I’m wondering is whether we should be concerned about the potential for something similar to the dot.com bubble from about 15 or 16 years ago happening in the not too distant future. My understanding of at least one of the causes of that is that was that many dot.com companies were focused more on growth than on actually making a profit. It seems to me that several companies discussed on this board may fall into that category.
I know it is not necessarily wise to have one’s portfolio too heavily concentrated in any one sector, but I am curious as to whether anyone on this board is concerned about another dot.com bubble-type event.
My understanding of at least one of the causes of that is that was that many dot.com companies were focused more on growth than on actually making a profit.
I don’t think that was a significant cause. The two causes I remember are a large number of companies who set out to do something “cool” who had no plan at all for how they were going to make money at it and investors who got caught up in the excitement of all the cool things such that they forgot completely about valuation or any kind of fiscal reality.
If you are afraid of a dot com like bubble, I recommend you to read up on just how crazy it got 16-17 years ago. Here’s one article from a couple of months prior to the bubble bursting:
Just to give you a perspective,right now companies like SHOP are trading at around 20 times the revenue. Yahoo’s market cap in 1999 was 300 times its revenue…
Maybe there will be a “cloud bubble” in the future, but there’s still a lot of ground to cover to get there.
Just to give you a perspective,right now companies like SHOP are trading at around 20 times the revenue. Yahoo’s market cap in 1999 was 300 times its revenue…
And it wasn’t just YHOO. I remember Bezos saying something like “I’m happy that investors have such confidence in us, but we’re just a store. 200 times revenues is overvalued!” Amazon has passed where they were, but it took them 10 years to come back. Yahoo NEVER came back. Neither did AOL.
And there were lots of companies that had NO REVENUE yet, just an idea, selling for hundreds of millions of dollars. And respected analysts were saying “Yes, XYZ is at 200 times revenues, but comparables are at 400 times revenue, so XYZ is cheap”. (I’m not kidding).
Stenlis said “Maybe there will be a “cloud bubble” in the future, but there’s still a lot of ground to cover to get there.”
Saul said “The cloud is nothing like the dot com bubble.”
But you both seem to agree that stock prices way above revenue was a significant problem. So isn’t the bottom line ask ally what Stenlis said, -i.e.- we could be on course for a cloud bubble, but even if so, it’s a long way off (to paraphrase)?
Shop is valued at about 6x estimated 2017 revenues. Not even close to bubble valuation.
What you have is execution risk, not valuation risk. The forward looking numbers are not overly aggressive either. In fact good argument it is conservative.
Either way, you lose money if SHOP is overblown and make or at least won’t lose much if it does as well as predicted in a reasonable manner.
Then there are companies like UAA who are sticking w prior revenue estimates, but lowering their profit margins.
There is debate whether this is good or not, but what you have is slowing revenue growth (even if still in low to mid 20%) with need to spend more money to keep this slower growth rate going. IE more real competition and thus lower ROI going forward = lower valuation multiple.
This can be said of say Inder Armoir and Skechers but not of SHOP. There is no evidence of SHOP competitive positioning becoming less desirable.
My understanding of at least one of the causes of that is that was that many dot.com companies were focused more on growth than on actually making a profit.
I agree with Tamhas. It wasn’t the pursuit of growth that was the cause of the tech wreck, it was more an incorrect assumption that a business can be made without a service or a product. Alan Greenspan, the federal reserve chairman at the time, famously predicted with his statement that “irrational exuberance” may be the reason that assets are getting valued so highly. All the pundits on TV were having discussions about the “new economy” and how the “old economy” companies that built things like Peterbilt (private) and John Deere Co (DE) were obsolete.
People were leaving good companies to go work for dotcoms that really didn’t have business plans that showed how they could make sales and generate revenue. Young engineers like me were buying IPOs directly, because everyone wanted in on these companies, and there were brokerages that were selling IPO shares directly to the public prior to hitting the market. People were also leaving good jobs to go become “day traders”, because everyone was a genius and making money.
The cloud companies are growing actual revenue at astounding rates and making high profit margins. They aren’t just spending IPO dollars and IR&D funds hoping to make something people would want. They are providing a service the market is already buying. Very different situation, but could something make the cloud infrastructure business model obsolete? Not that anyone can think of today.