Companies like Uber are losing vast amounts of money, and keeping the lights on with promises of growth to their investors. Companies often make purchases of app creators for hundreds of millions of dollars, even when the acquired company has never made a profit.
Many entrepreneurs launching apps seem to be far more interested in getting money from VCs than in selling their product. Is this sustainable? Are we going to see a repeat of the 1990’s bubble and resulting crash?
A lot of people think the whole stock market is in a bubble.
Certainly many tech companies will fail. But there is a lot of tech which is changing the world.
I don’t think Uber is a good example of a tech bubble company like we saw in the late 1990s. It is easy for me to see how Uber could make a profit and they provide a service. They’re not full of techno babble nor are they trying to make profits by selling 50 pound bags of dog food at a lower price than retail stores with free shipping. Uber isn’t spending millions on Super Bowl commercials, I don’t think they advertise on TV at all.
Almost all of the increase in the stock market for a while has been in tech stocks. Traditional company stocks are mostly flat.
So plenty of people are expecting a “correction” any day now and it’ll affect the tech companies most of all. But betting on this is the standard way to lose a fortune.
There was a biggish sell off of the Big Five (Apple, [del]Google[/del] Alphabet, Microsoft, Facebook and Amazon) a few weeks ago. Harbinger or fluke? Who knows.
Of those 5, Facebook is the closest to being a house of cards. Growth in countries in with strong economies is going to be an issue. Apple and MS are in a good position but with questions about their long term future looming. But “long term” here means longer than a typical stockmarket boom-bust cycle.
Google and Amazon are in really good positions to continue growing in both their standard markets as well as newer ones.
So I don’t see an overall tech bubble. OTOH, there are some ridiculous companies out there that are going down hard soon. There are already signs of slackening of hiring in Silicon Valley.
The problem is that when some tech companies tank, the stocks of the other ones get hit, too. Just because. So it could end up looking like a bursting bubble.
Send your CV in to Uber and you might be this week’s CEO!
Uber’s losing $2 billion year. If you could turn that around you’d be a business legend.
You want a bubble to watch as it pops, take a look at Bitcoin and the other main crypto currencies.
Facebook has turned the online advertising market into a virtual duopoly. Of the top 10 mobile apps, all are owned by Facebook or Google. It’s largely managed (give or take an Oculus) to avoid the acquisition curse and most of it’s major acquisitions have further cemented their dominance. Something like a sixth of all the minutes spent online is spent on a Facebook property.
It’s possible all of this would collapse but it’s going to take a lot more than many naysayers assume.
Uber is losing so much money because it is investing in growth. All Uber has to do is to quit entering new markets and quit working on self-driving vehicles and the loses will come down massively.
Count me in on the “yes, there’s a tech bubble” side, to the extent of putting money down against a number of companies.
Although the Google / Amazon / Apple triad are probably overvalued, they’ll likely continue to be overvalued in the future even after corrections. You might make some money if you got lucky and timed a macro correction, but I wouldn’t go short on any of them just on that.
But there’s a whole stable of smaller tech companies out there with laughable valuations. SNAP was one, and indeed is profitably correcting downwards now.
Although not shortable, Slack is another - it is just mind-blowing to me that it had 2/3 the valuation of Whole Foods when Amazon had it’s acquisition hat on and was considering Slack or Whole Foods. Slack has 1.5M paying customers, produces nothing tangible or in line with Amazon’s portfolio or strategic direction and would be very hard to monetize further, and certainly not to the tune of being worth a $9B acquisition - compare against Whole Foods that is the top category killer in organic groceries with huge brand name recognition, has at least 80M paying customers every year, 400+ locations, logistics and distributor and wholesale networks all in place, and is directly in line with Amazon’s strategic moves into groceries and physical retail. It’s nothing but the purest speculation-driven madness to think Slack could be worth 2/3 of Whole Foods, and if I could go short on it I would.
Similarly for a few other currently non-public companies, and I drool to think of being able to short Uber…which I suspect is why most of these (Dropbox, Uber, Slack, Pinterest others) are refusing to go public thus far, because there’s little chance they would meet their last-round valuations when valued in public. I suspect that chance is going to decrease irredeemably further if there’s even a small macro correction in tech stocks in 2017, which should be an interesting show as it plays out, although I can’t think of any way to make money on that.
Uber is a special case of a laughably obvious short - they produce nothing of value that can’t be immediately replicated by other companies, while losing billions and committing fraud and theft on their supposed journey to self-driving cars, in addition to publicly melting down in a sea of scandals from the CEO on down. Although they pioneered and brought “ride-sharing” to the public eye, that’s done and isn’t monetizable - if and when Uber fails, Lyft and others, and eventually Google or whoever moves first in on-the-road self-driving car fleets, will handily step in because all they provide is a platform that’s easily replicable in function. Now that people know how convenient it is, they can move seamlessly on both the driver and passenger sides to Google Ride or whatever the next dominant player is in the space, and Uber can literally do nothing about that except continue losing billions to advertise and subsidize rides in a futile attempt to keep their customer base. Not a sustainable business model.
Really, the worst part about the current bubble is how difficult it is to put your money where your mouth is, with a lot of the prime targets keeping themselves locked up non-public and thus non-shortable.
It’s not that bubbly.
There are IPOs that are doing shitty instead of quadrupling, etc.
What do you have is some rather crowded trades in a handful of names, the FAANGs, etc. And so their valuations are higher than normal which is affecting some indexes that are highly weighted by them - which then drags up the price of other stocks via ETFs.
And recent action in some semiconductor stocks based on speculation that crypto mining is going to become some huge hobby is pretty frothy.
It’s been long enough since the Jan/Feb 2016 correction that a 10% pullback is gonna feel a lot worse in the moment than it is.
Facebook “only” spent two billion on Oculus, although that’s two billion more than it’s worth. But they spent nineteen billion dollars on WhatsApp. That sounds like crazy-ass money to me. But when these companies are worth as much as they are, a billion here or a billion there is meaningless.
Remember that most of the time when the venture capitalists invest in companies (or one of the big boys buys another company), they have no idea which one is likely to succeed and which is not. There’s no magic formula here. They’re just throwing money at companies and hoping one in a hundred succeeds. (Which is why someone flushed $2.5 million down the toilet by investing in a company whose app is designed to let you send “yo” to another person.)
In short, yes, it’s a bubble.
I think you are downplaying the value of patents. Venture capitalists invest in companies that own potentially valuable patents. Big companies buy companies that own patents they want. The makers of the Yo app you mentioned, for example, has a patent that Snapchat recently paid $7.7 million to use.
I wasn’t aware of that patent deal. But according to that article, they bought the patent from the individual behind the Yo app, so it benefits him personally, not the company.
There might be an Uber bubble right now, but it’s not a tech bubble. Uber may very well go under, but if it does, it’ll be because it was beaten by Lyft or another one of its tech competitors.
Look at what happened in the previous tech bubble: Companies went under because either they didn’t have a product or service for which there was a market, or because that market was served better by a non-tech company. Uber has a service for which there’s definitely a market, and the traditional taxi companies are doing an even worse job of serving that market.
Companies aren’t valued on the here and now, they’re valued on potential. Whole Foods was a company on the downswing with significant shareholder discontent and not a compelling vision for the future. It’s competitors were rapidly copying everything that made it unique while avoiding all of the various pitfalls it had fallen into. The top leadership seemed intent on putting it’s fingers in it’s ears and blithely pretending nothing was wrong. It was a smart acquisition for Amazon but I see perfectly well why it was priced as low as it was.
Slack, on the other hand, has a really exciting growth story. It’s trying to position itself as the central “hub” through which all enterprise SaaS would interoperate through and become the new operating system for the enterprise. If it manages to accomplish this, it has the potential to become the next Microsoft and earn monopoly size profits across all of enterprise.
Is this likely to happen? Probably not, Slack still faces a lot of deep challenges and questions on the basic viability of the vision. But they have a solid leadership team that can articulate the opportunity and demonstrate why they’re uniquely positioned to capture it.
Slack isn’t valued at $9 Bn because investors think it has a 100% chance of being a $9 Bn business, but more because it has a 2% chance of turning into a $500 Bn business. Even if there’s a 98% chance that it will fail, it still remains a smart buy.
I think they’re actually pretty similar.
Selling dog food is a business that you can be successful at. Selling it priced below your costs isn’t. Providing car service is a business you can be successful at. Selling it priced below your costs isn’t.
If you look at Uber and see that they could easily make a profit… you’re wrong. For Uber to make a profit they’d have to increase their prices a lot. At which point they aren’t eating the competition nearly as effectively. It’s like the web-dog-food business. All they have to do is increase their prices and they’re a viable business. Except that the primary reason they have customers is price.
Yeah, but they’re spending hundreds of millions on underpricing the market to get word of mouth advertising.
I understand this, but disagree. It’s a snowball’s chance, and I’d say the smart money lies in buying the distressed company directly in line with the two major strategic directions you’re taking your company, rather than gambling billions on the one that has zero synergy but might somebody actually be a thing someday if the stars, moon, and sun align. Amazon clearly agreed, which I think speaks well of their leadership.
And really, it’s exactly that over-optimistic gullibility that I think is driving the bubble - with a lot of the unicorns, there is literally no credible way they could ever reach revenues that would scale to and justify their current valuations, even doing optimistic back-of-the-envelope math. You basically have to put in step 2 below to even believe it:
- We’re a unicorn with a product or app! We have three and a half users and no revenue model, and if a miracle occurs are on track for 9 billion users!
- A miracle occurs, and we become the dominant, global, platform for XYZ, crowding out all (established, giant) incumbents!
- We will make the transition to monetizing our users who only ever signed up because our thing was free, which most of us will do by competing with Google and Facebook who own the ad space to the third nine, and each have at least 100x more employees and smarts and war-chest than we do!
- Profit!!!
That’s Uber’s strategy (minus step 3), with the miracle being self-driving cars eliminating their drivers. That was Twitters strategy, with the miracle being being able to sell enough “promoted tweets” or accounts to carry three thousand employees in the heart of Silicon Valley and drive future growth without alienating their user base. That was Snapchat’s strategy, with the miracle being either millennials suddenly having money and companies not caring about click through or return on advertising dollars, or somehow appealing to moms and grandmas and companies not caring about click through. There’s similar miracle steps for pretty much all the others I mentioned.
Of course, as you point out a VC’s job is to take a gamble on something that has a credible chance at being the Next Big Thing and spread the risk around a bunch of them…I just don’t think many of the current flock of tech startups or unicorns actually has any sort of credible chance at that, and many of those investors have been too gullible and will take a bath.
Uber is not well positioned to move to the self-driving taxi business.
Look at their business model. Their entire plan is to act as an intermediary between people who own cars that want to drive, and people who want rides. It’s a great business model because it is effortlessly scalable, to add another driver costs nothing, you just sign up a guy with a car, and it either works out for him or it doesn’t, but either way Uber gets a cut.
Owning a fleet of self-driving taxis is a whole different business altogether. For that you need to actually put capital–real money–into buying cars, servicing cars, repairing cars, cleaning cars, policing cars. In Uber’s existing business the drivers handle all that. The driver purchases the car. If a customer pukes in the back seat, the driver cleans it up. If a customer smashes the windows, the driver pays to get it fixed. If the car breaks down, the driver pays to get it fixed. If the car needs an oil change, the driver takes it to Jiffy Lube and pays for the oil change. As the car puts on extra miles and suffers wear and tear, the driver owns the depreciating asset.
The advantage to Uber is that all the hassles of running a taxi company are outsourced to the drivers. Owning and maintaining a fleet of self-driving cars is the opposite of that business model.
I can easily believe that in a few years you’ll be able to hail a ride from your phone and a clean safe well-maintained self-driving taxi will appear in minutes and take you to your destination. But if that taxi has Uber branding on it, it will be because some company bought the Uber brand during bankruptcy.
I suppose it’s also possible that Uber will radically change itself from a technology company to a transportation infrastructure company, but successful transitions like that are few and far between in the business world.
Slack has no chance of being a $500b business, unless they discover unobtainium. None. Only 1 business has >$500b in market cap (Apple) and none have over $500b in annual revenues.
And it’s just me, but I can’t reconcile a wager where I had a 98% chance of losing as a “smart buy”. Just can’t.
Is tech in a bubble? I don’t think it matters as much as it used to, but probably not. I don’t get that “this time, it’s different!” feeling like there was back in the 90s.
That’s because you don’t have enough money to invest in 1000 of 'em. If you’re rich enough, and each bet is a small enough portion of your bankroll, then the Expected Value is the important thing, not the odds of any one bet paying out.