Here's The Evidence That The Tech Sector Is In A Massive Bubble

http://www.businessinsider.com/evidence-that-tech-sector-is-in-a-bubble-2013-11

by jnazario • 13 years ago

81 77 13 years ago

d4vlx5• 13 years ago

I was in university during the late 90's .com boom and the current situation does not feel the same. While some of the high prices being paid for startups and talent in silicon valley point to some possible over heating it does not seem to be affecting the wider tech world in the way that .com boom did.

In 1999 and early 2000 every investing show on TV would constantly be talking about the new highs that Microsoft, Cisco, Nortel hit or the latest up and comers and the massive amounts of money being poured into it all. It wasn't the normal speal, it was like watching a cheer leading squad cheer on the the never ending boom. I don't know quite how to describe it, it was kind of eerie and surreal. And it wasn't just the investing shows that were doing it, it was being talked about all over the place, even outlets that would not normally talk about anything money or stock related.

The current situation does not seem much like that to me. Sure there are several cases of companies with sky high valuations and questionable future revenue but it's not industry wide like 1999.

teddyh4• 13 years ago

The eternal claim of bubble-deniers is “This time it’s different!”

This does not prove or disprove anything, of course. But it does make “This time it’s different!” an insufficient proof of something not being a bubble.

pg• 13 years ago

And that is in turn the eternal claim of bubble believers, usually delivered as reflexively as above.

https://www.hnsearch.com/search#request/comments&q=%22this+t...

Is d4vlx mistaken? If so tell us how.

d4vlx5• 13 years ago

I agree that basically all I am saying is "This time it’s different". That is my interpretation of the situation, take it for what you will. I am not trying to prove anything and do not believe in predicting the markets in general.

gaius9• 13 years ago

This time it is different.

I'm not denying it mind, but I too was there in the 90s. It was a crazy time. You would get in a taxi and the driver would be talking about stocks, giving out tips, talking about his portfolio. It was everywhere. Nowadays not so much. And outside Silly Valley, allowing for inflation tech wages have been basically flat since '01. A few years later it was the housing bubble, and everybody, everywhere was talking about property, buying, selling, renovating, letting. Now, if you put your ear to the ground, it doesn't sound like before.

But then as now, money is too cheap and money cannot stand still, it has to go somewhere, then a bit later it just evaporates. So it's bubble, but a different kind of bubble.

jarofgreen• 13 years ago

So if its different from the .com boom, what does that mean? Does that mean it won't crash ... or that it will crash in a different way?

d4vlx5• 13 years ago

In essence I was saying that I am not seeing as many or as sever warning signs. That is just my interpretation based on the very limited information that I have now and had then. I am not trying to make any predictions, I do believe in predicting the market.

gaius9• 13 years ago

There is too much money, and it has nowhere to go. Even the property bubble is starting up again. It won't be "the value of tech stocks" that crashes, it will be "the value of money". Which means inflation, and anything imported will become more expensive.

colinbartlett• 13 years ago

The author lost all credibility with. "Guess which way this line is likely to go next."

Past performance is not indicative of future results.

gaius9• 13 years ago

The market can stay irrational longer than you can stay solvent.

czbond3• 13 years ago

Great quote and very true!

fiatmoney• 13 years ago

That's a trite disclaimer. If the economy as a whole is growing at N%, and the price of equity in the economy is growing at M%, eventually the two WILL converge. At what overall level & when that happens is difficult to predict, but unless you think nominal GDP is going to grow at 10% in steady-state, steady-state stock returns of 10% are impossible.

exit2• 13 years ago

will be interesting to see whether the drive to get people to learn programming survives this bubble

czbond3• 13 years ago

I don't believe it will. It dipped considerably after 2000. I believe the "learn to program" mantra has been pushed by A) Companies making money on this space B) Companies whose tech labor costs are too high. Pair this with the fact that I have a CS degree and know about 8 languages

exit2• 13 years ago

Pair this with the fact that I have a CS degree and know about 8 languages

i don't follow. what happens when we pair a and b with this fact?

Ellipsis753• 13 years ago

If it's a bubble as a programmer is there anything I can do about it or do differently? I don't have any shares.

betterunix• 13 years ago

General advice:

1. Settle your debts soon. Losing your job does not mean losing your debts.

2. If you have no debts, save your money with low-risk investments (or a bank account, but then you are probably losing to inflation). If you lose your job you will still need to have some money available.

textminer• 13 years ago

What's the best way for an average person to invest? Can and should ones buy index fund, or just lower-risk hedge funds?

gaius9• 13 years ago

Pay off your debts, put some aside, and practice living cheaply. Learn to cook, specifically learn to make hearty meals with cheap ingredients. Re-sole your shoes rather than buying a new pair. Put off a new laptop, phone, etc for an extra year. Specifically as s programmer, look at your skills, and make sure you are good at something that has high barriers to entry and sustained demand. Some people call this "legacy", but I call it "bread and butter".

michaelochurch• 13 years ago

My (perhaps contrary) view: programmer salaries for the 99% are not really inflated. Yes, there are rock stars (usually managers) getting $250k signing bonuses, but they're not the norm. I think that average software engineers ($70-175k, depending on experience) aren't going to see an appreciable drop in pay or job availability.

Keep building your skill base and stay the course. It takes weeks (for people with marketing acumen) to make the next hot thing but years to build a technical skill base. The latter has less risk, so that's what you should do. If your career and job conflict, invest in your career, because your job can end at any time. (This advice applies always, not just in late-bubble times.) Divide your time (if you can) between high-level/front-end and low-level/back-end work. The former's good because it makes it easier to get to demos quickly, and communicate ideas in a slick, technological way; the latter, however, is a lot more stable. C and linear algebra and Lisp (the idea) don't change as much over 5 years as web tools.

There is a bubble but it's not nearly as bad as the one in the late '90s, and I don't think it's going to wipe out the whole software industry-- it'll just slow down some parts of it.

tinco• 13 years ago

So much technical analysis, and so little actually valuable information.

The thing is, anyone can draw a sawtooth over these kinds of things. The catch is, how wide is the sawtooth? Why would the market crash _now_ and not in for example, 2 years, or 5, or 10? You can't predict that with simple technical analysis, you need actual indicators.

What are the indicators they suggest? Anecdotal evidence that some companies have some investments in businesses that don't seem like they're worth it.

So what if AH stopped investing in early stage B2C startups? Perhaps they've just looked at their portfolio and determined their risk to be saturated? And what does the valuation of B2C have to do with the overall valuation of the tech industry?

Why is no one showing the numbers, how much money is in B2C tech startups right now? How much is in B2B tech? How much revenue are these sectors generating? How can we be expected to make a judgement over if we're in a bubble or not if instead of useful numbers they give us a bunch of anecdotes?

Articles like these are FUD, I don't know what the motivation is.

Please note that I'm not saying we're not in a bubble. I'm just saying this article is not helping us deciding if we're in one.

j_baker• 13 years ago

Is it just me, or does it feel like the tech sector can't do well without someone crying bubble?

This article in particular starts off with some relatively good data, but the rest of it is just anecdotal hogwash. Particularly the wage issue.

bjourne2• 13 years ago

Assume the stock market follows the theory of supply and demand. The amount of stocks is mostly constant, so if the stock prices increases then the demand must also have increased. Why has the demand increased? Because more people want to put more money there. Why do they want that? Because they have more money and the only reasonable thing to do with that money is to buy stocks. Why do they have more money? Tax cuts for the rich. There is only so many yachts and cars you can buy, the rest of the unallocated capital has to be invested somehow.

Will the demand for stock continue to grow? Perhaps if there are more tax cuts or if more money is "freed" so it can be put in stocks.

judk• 13 years ago

It isn't "tax cuts", it is QE3, with the government pumping hundreds of billions of dollars into the securities markets.

bjourne2• 13 years ago

It was tax cuts during Bush's years. But yes, the end result is basically the same though.

websitescenes• 13 years ago

I couldn't agree more only I would say there are now hundreds of small bubbles that will pop at random and continuously. I'm talking about the startups that have no real value besides the fact that someone has invested in them. These businesses are propped up and made to look successful while in reality, they are nothing more than a localized bubble. Now don't get me wrong, there are startups with real services and long term value but most are just a show. It seems like the goal of many major investors is to prop up a startup make it look successful, offer stocks publicly, cash out and repeat. These people are not creating lasting wealth. They are mining money from the general public.

tcbawo• 13 years ago

There will be collateral damage also. When the tide goes out, companies that derive their revenue from failing companies will suffer.

jrochkind1• 13 years ago

I think OP is probably right.

But the quote at the end from the New Yorker article omits the next part where Draper himself does -not- believe there's a dip or crash coming -- although the author thinks Draper's evidence points there, Draper does not, he thinks we're at the part of his graph where the next thing is a boom, not a crash.

The very next sentence:

I asked him what he thought the next dip would look like, and he frowned. The coast was socked in, and the Ritz golf course seemed kind of scraggly. “Well, first we need a boom,” he said.

My gut feeling is to agree with the OP, but the OP is a bit sloppy with it's evidence.

3pt141593• 13 years ago

This is not a fucking bubble. I was working for a startup when I was 14 back in actual bubble days. There is no way that investment money is flowing from mom and pop investors to startups. None. Back then there was, because VCs could unload a company with ZERO product onto the stock exchange "we're building the online parking ticket payment platform of the future" 300 million dollar valuation, no revenue, no deals, just a broken half finished application and every mom and pop doing back of the napkin math as to how much they would be worth once NYC and Toronto jumped on board their platform.

Do you know why Pinterest is worth a crap ton of money? Because they own women online. Just like Facebook owned twentysomethings online. When you control how a demographic shares information, it is trivially easy to generate revenue. Before you even both getting distracted by revenue, you focus on how far you can build out your base before you make money off of it.

I've been saying we're not in a bubble for the past 5 years, and we still arn't. If I've had a 7 digit exit for a machine learning company and I can't just walk into a VC firm and raise money for my next thing, then we arn't in a bubble.

gaius9• 13 years ago

There is no way that investment money is flowing from mom and pop investors to startups

It is tho'. QE -> inflation -> erosion of life savings. The difference is, this time these guys don't get a choice.

tptacek8• 13 years ago

Inflation is lower today than it was in the middle of the housing bubble.

3pt141593• 13 years ago

QE is two or three orders of magnitude more than VC outlay and VC outlay has not drastically expanded over the past seven years. There is no bubble.

mangeletti2• 13 years ago

The prices of acquisitions, despite their possible justifications, is becoming a bubble because of all the recent revelations about the value of ("big") data, and of users' time spent online (i.e., a land-grab). Investors are learning that data and user acquisition (regardless of how much money is made per user) is really valuable, but it's hard to value both, since the monetization of both has proven inconsistent and, in some cases. For instance, Facebook has a lot of users and even more data. Their current valuation in the open market puts their market capitalization at 94 times what they currently earn (net profit) in a quarter. That's about 4 times what is "normal" for a popular investment, and about 7 times more than Apple (which is currently the most valuable company on the planet).

Now, the bubble doesn't have to burst. Assuming companies like EMC, IBM, and the hundreds of smaller companies with data analysis offerings can come up with increasingly efficient and offerings that increase revenue per user/data-point. The best that most user/data-centric start-ups can currently get (without loads of capital) is affiliate commissions or "data-driven" ads (from Google, et al). This is rapidly changing, and if it can keep pace with the demands, there's no reason the current bubble can't turn into a profit center.

Another thing worth noting is that, while user/data-centric start-up valuations are (very much) on the high end, other, unrelated software and hardware/IaaS companies are thriving in sectors that aim at replacing human workers in various fields (ecommerce, marketing, accounting, medical [you name it], etc.) with machines. This is intrinsically valuable and cannot be described as a bubble any more than replacing manual gas pumps/attendants with automatic ones can. It's just the fruition of efficient ideas, coupled with readily available technology at prices that the SMB market can afford.

TL;DR

The bubble in user/data-centric start-up valuation doesn't reflect the rest of the technology sector, and user/data-centric start-ups are quickly learning how to turn the aforementioned into a profit.

alphydan• 13 years ago

> 7 times more than Apple (which is currently the most valuable company on the planet).

Something is missing in that sentence. The most "valuable publicly traded tech company"? Or is it another definition of valuable? or of company? At around 400bn it's less valuable than Saudi Aramco (with a value around $2 - $5 trillion USD, PetroChina (1Tn) or Pemex (also about 400bn!).

http://blogs.mccombs.utexas.edu/titman/2010/03/01/more-thoug... http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aA1jw... http://www.ft.com/cms/s/2/5de6ef96-8b95-11db-a61f-0000779e23...

mangeletti2• 13 years ago

Oops, I meant in the US, not the planet. Also, AAPL is at 467.25B.

conanbatt• 13 years ago

The fundamental difference between the valuations today and those in the 2000 is that most tech companies are actually operationally solvent. That is not true for all of them, but if a crisis hit valuations and investors lost all confidence, companies with operational solvency will care very little and will not close down.

There is something similar to a bubble that plagues the sector and its those B2C companies that insistently build themselves to capture users and get their value from selling out to the big boys without ever making a decent profit.

Fingel• 13 years ago

I could care less if the bubble pops. In fact, it would probably be a good thing. Everyone who is in tech for the wrong reasons would have to find something else to do. San Francisco might go back to being a liveable city. And the real hackers, the ones working on real problems (instead of novel ways to share pictures of cats online) would suddenly find themselves back in an environment that closer resembles reality.

hkarthik• 13 years ago

Are a few firms overvalued right now? Of course. But that's nothing new. Healthy markets have a mix of overvalued and undervalued stocks.

The main difference today is that most rational investors understand the diversity of software firms. The business model and drivers of a company like Facebook differ wildly from a company like Workday. But back in the 90s, they both would have been lumped in together as "tech stocks".

The only common ground between tech firms today is that they often compete for the same talent and investment. But that seems to be changing slowly as the industry matures.

pearjuice• 13 years ago

The question was never whether we are in a bubble or not. It has always been when it would pop.

tptacek8• 13 years ago

My memories of the 90's bubble:

* Extended friends and family, none of whom worked in tech, were all considering investing in tech stocks.

* For that matter: everyone I knew was investing in equities.

* Largely profitless Internet brands bought up most of the Superbowl ad inventory

* Startups were funded whose business models were dominated by inventory and logistics costs

* Startup marketing (not just promotion, but all of marketing) was focused on epic launch events

* Companies with no profits routinely had public offerings

* Seemingly hopeless capital-intensive ideas (like 1 hour free delivery of candy bars) were kept afloat for years by investment dollars

* Most American consumers had limited access to the network, and nobody had ubiquitous mobile access

* You could close your eyes and fall backwards into an A-round (for instance: we managed to do it), which was the de facto standard first financing vehicle for startups

* The major investment banks not only fought over tech IPOs, but housed famous talking heads who spoke on TV and wrote op-eds cheerleading specific tech startups

* To get a web app launched, you bought several Sun servers and a 3-4RU Cisco router, each of which cost mid-5-figures. Oracle was your database.

* Cisco would "sell" you routers in exchange for company equity, and book the sale as revenue

* Totally reasonable for a startup to write its whole deployment stack, including application logic, in C

* Virtually all software development was done waterfall-style, frequently with an MBA calling the shots

* Just-formed startups had 5+ person "marketing" teams and 2-3 person "bizdev" teams

* $100k+ logos, $75k/yr to PR/branding firms

* Startups promoted themselves with print ads in magazines. That was a normal thing to do.

This is just a random list; I'm sure others here have better points. Writing it, I'm struck by how much worse startups and startup business practices were while generating so much more interest from the broader market than they do now.

I have a hard time believing that anyone who thinks we're in another dot-com bubble was actually working during the dot-com bubble.

The article itself is almost offensively bad. The fed funds rate was over 5% during the dot-com bubble. Stocks are doing well now, but so is everything else, and the notable tech stocks helping drive the market are drowning in cash that they're generating directly from consumers. "We're due for a downturn"? What does that even mean? Buy puts? Salaries are high? Maybe we're having an easier time paying engineers now that we're not using that money to buy TV ads or pay MBAs to "monetize eyeballs with brand equity". The rest of the article seems to be a critique of how big companies are choosing to spend their money --- but whether or not you think Yahoo should buy Tumblr or Twitter should be giving VP/Engs 10MM in stock, companies making decisions with their own money isn't what characterizes a stock bubble.

Obviously, what this article is really trying to do is to make a prose slideshow with links to other Business Insider articles, because its author had nothing better to write today. Jose, you're not dumb. You can find better articles than this. Unless this submission was sarcastic, in which case, well played.

oijaf8882• 13 years ago

* Startups were funded whose business models were dominated by inventory and logistics costs

Wouldn't that describe the whole flash sale industry and hence its recent decline?

Although I don't think that any 1 point makes a bubble, it is interesting how some of them are recurring now.

tptacek8• 13 years ago

Aren't Fab.com's costs dominated by headcount and marketing? Do you understand what I mean by "dominated by inventory and logistics costs"? I mean companies who owned multiple warehouses full of inventory, and who assumed direct responsibility for getting that stuff to customers.

codex2• 13 years ago

It also describes Amazon, whose stock has been on a tear.

sophacles• 13 years ago

The internet then was a fancy new magic. The internet now is just a fact of life. This one thing changes a lot.

codex2• 13 years ago

Sadly, tulips were not invented during the great tulip mania, either.

gaius9• 13 years ago

I am having difficulty correlating your tech stuff with the other bits. In the 60s they wrote all their apps in COBOL and ran them on mainframes, was that because they were crazy? No, it's because that is just what people did then. I was working in that space at the time, our flagship sites were written in C++ (NSAPI) and that was a totally reasonable thing to do...

tptacek8• 13 years ago

It cost much more to operate a tech startup in the 1990s than it does today, and, having started one, it cost much more to get an offering to market. Capital costs were higher, development cycles were longer, headcount was greater. So when you look at the prevalence of startups in both the market and in popular culture in the 1990s, you have to understand that they represented significantly more invested dollars than today's startups do.

jhallenworld2• 13 years ago

* Visits from Enron's gas pipeline guys to learn how to install routers for their network commodity project

tptacek8• 13 years ago

I was at a CDN startup in '99 and remember competitive slide decks with Enron's name on them.

7Figures2Commas• 13 years ago

The fundamental flaw in your argument, and in most of the talk of a "tech bubble", is that the environment today is being compared to prior environment.

The phrase "tech bubble", used today, is really a misnomer. Extraordinary action taken by central banks around the world in recent years has created multiple asset bubbles. Most of them are, directly and indirectly, interconnected and many are feeding off of each other. You seem to have some recognition of this when you write, "Stocks are doing well now, but so is everything else...", but it doesn't appear that you care to ask the question, "Why is everything doing so well?"

If you work or invest in technology, it's understandable that you would have a primary focus on the sector. But when evaluating the notion of a "bubble", not looking at what is taking place from 30,000 feet is like looking at a fly on an elephant's behind.

chalst• 13 years ago

The following is false, confusing the short-term financing available under QE3 with the cost of financing business investments:

Interest rates are basically at zero and have been for some time. When borrowers are paying close to zero interest on loans, that makes money cheap to get.
People with money generally have a choice: save it in interest-paying, risk-free bank accounts or invest it in riskier assets that may pay more money over time. When interest is at zero, virtually any other kind of investment is likely to pay more because the risk-free alternative is so lousy. So investment asset bubbles get created. Stocks tend to go up.

QE3 consists of a series of very short-term loans (initially they were 1-day loans) that keep being redeemed and reissued, with the promise that the money injected into the system in this way will be taken out in the medium term. (This death sentence on the QE3 money is the reason why the money injected into the economy has not had the inflationary impact predicted by gold bugs).

Such very short-term loans are very valuable for financial institutions: they can finance short-term speculative investments and can be used as a partial basis to create longer-term financing. However, they do not provide the kind of investment Business Insider claims. For this kind of investment, you need financing over a period of years. 10-year treasuries, which provide a basline for the cost of longer-term financing, are relatively cheap, at 3.4% interest, but they are most certainly not interest free.

Every venture capitalist understands this, I am sure. A competent journalist who covers business financing will understand this too.

null_ptr• 13 years ago

“The thought was that well-fed developers could create value better than the stock market.”

And amen to that. I can't believe the quote above was meant to be a snarky comment instead of a blunt dose of realism.

dkwak• 13 years ago

What's a good resource for learning about the web bubble of the 90's? I would assume that a large portion of the HN audience (including myself) didn't actually live or work during this time, so it's hard to compare to today's tech industry. Is it worth knowing the details behind it?

jkarni• 13 years ago

Are the first two points made in the article really legitimate? Central banks decrease interest rates in crises, so I wouldn't expect lower interest rates to be correlated with (or to be reason to increase your credence in) a bubble. And the past stock market prices alone being evidence for future prices? Doesn't that assume that the random-walk hypothesis (and the efficient-market hypothesis) are wrong?

Here's The Evidence That The Tech Sector Is In A Massive Bubble

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