
Here's The Evidence That The Tech Sector Is In A Massive Bubble - jnazario
http://www.businessinsider.com/evidence-that-tech-sector-is-in-a-bubble-2013-11
======
d4vlx
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.

~~~
teddyh
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
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...](https://www.hnsearch.com/search#request/comments&q=%22this+time+it's+different%22&start=0)

Is d4vlx mistaken? If so tell us how.

~~~
teddyh
I do not claim to have some proof towards either “side” of bubblism or non-
bubblism. I was merely trying to point out that d4vlx’s comment essentially
only said “This time it’s different!”, and I wanted to explain that this does
_not_ prove it’s not a bubble, since every bubble is different than the last
one.

My comment does not show that it is a bubble, nor was I trying to do so. The
most that could be claimed is that I was trying to show that the possibility
that it is a bubble still exists.

~~~
DenisM
You aren't doing justice to d4vlx’s comment. What he said is that this bubble
has not permeated the community outside of tech, whereas the .com bubble did
(and I would add the housing bubble, and the per-depression bubble). A larger
bubble is always producing a larger bust, with non-linear effect.

"This time is different" is normally referring to "tech is changing the world,
we don't need he profits, it will grow forever, this time it's different" or
"they don't make any more land, housing prices will grow forever, this time
it's different". It's not at all the same things to point out that the scale
of the bubble is much smaller. Lumping the two together produces a strong
impression that your comment is disingenuous.

~~~
teddyh
So, this could simply be a smaller bubble. “This time it’s smaller!” is an
equally non-persuasive argument.

~~~
d4vlx
What is the difference between a "market correction" and a "bubble"? Do you
think there is a risk of the entire web industry imploding like it did in
2000?

~~~
teddyh
The risk of anything happening very much like the last time is always low.

------
tinco
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.

------
chalst
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.

------
conanbatt
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.

------
Ellipsis753
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
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
What's the best way for an average person to invest? Can and should ones buy
index fund, or just lower-risk hedge funds?

~~~
enoch_r
1\. Figure out your risk profile--if you're young and won't need to use your
savings for a while, you can take a lot more risks.

2\. Your risk profile determines the ratio of stocks to bonds that you want to
invest in. Stocks are higher risk, but they've historically given _much_
higher returns than bonds. One bit of classic investment advice is "put {your
age}% in bonds, everything else in stocks."

3\. Buy index funds or ETFs. For longer term, ETFs are a better deal, and
while supposedly less "convenient," it really isn't hard to open an account
with an online broker and buy ETFs. You have a lot of options here, but the
S&P500 is the standard. You could put some percentage into emerging markets,
small-caps, etc. The nice thing about ETF's, or index funds for that matter,
is that they're partially diversified by nature, so unless you really try
you're not going to get a portfolio that's highly susceptible to one
particular type of risk. Remember that every time you trade you're probably
paying a brokerage fee, though--if you pay an $8 fee on a $1000 investment,
that's almost 1% gone--a few months of expected returns!

4\. Repeat as you save money.

5\. Ignore all market advice, news that "X is a bubble," "Y is about to
crash," "Z is about to take off," etc. People who are consistently right about
this sort of thing are making billions in the stock market, not writing blog
posts or newspaper columns. And even if they are working on Wall St, it's
difficult to tell the difference between luck and acumen. If returns were
purely random, with nothing called "skill," we'd be statistically quite likely
to see someone like Warren Buffett--who has beaten the market consistently--
just like we're statistically quite likely to see someone win the lottery. Buy
and hold, only sell to spend. That's the _only strategy you follow_!

6\. Exception to 5: if you like to gamble. :) There's nothing wrong with
having a "fun" investment or two, as long as you know that they're a
consumption good and don't really count on keeping them.

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

------
tptacek
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.

~~~
oijaf888
> * 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.

~~~
tptacek
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.

~~~
oijaf888
I was thinking more like Gilt since I believe there were some articles a year
or two ago about how they were sitting on a ton of unsold inventory. Although
Fab did come to mind, does Fab not take any inventory risk on their products?
Or would you not include either of those in that category since they don't do
the actual delivery to the customers as WebVan did?

------
jrochkind1
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.

------
3pt14159
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.

~~~
gaius
_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.

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

~~~
gaius
It is certainly reported as such. But when energy[1], travel[2] and food[3]
are all going up "faster than inflation" then the official number is
misleading, no? And interest rates on savings - because there is so much money
sloshing around - are at historic lows.

[1]
[http://www.bbc.co.uk/news/business-24716146](http://www.bbc.co.uk/news/business-24716146)
[2] [http://www.theguardian.com/uk/2011/dec/20/rail-fares-
rise](http://www.theguardian.com/uk/2011/dec/20/rail-fares-rise) [3]
[http://www.dailymail.co.uk/news/article-2463143/The-cost-
liv...](http://www.dailymail.co.uk/news/article-2463143/The-cost-living-
rising-faster-UK-Europe-soaring-food-energy-bills.html)

Deliberately linked to both the Graun and the Mail there so no political bias.

~~~
tptacek
Inflation is _significantly_ lower than it was _during the middle of the
housing bubble_. The factors you bring up would need to be distorting the
numbers wildly and incredibly in order to make today's inflation levels a
proxy for what tech stocks did to retail investors in the 1990s.

------
Fingel
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.

------
dkwak
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?

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

------
mangeletti
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
>> 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://blogs.mccombs.utexas.edu/titman/2010/03/01/more-thoughts-on-
the-value-of-saudi-aramco/)
[http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aA1jw...](http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aA1jwRD9tCuA)
[http://www.ft.com/cms/s/2/5de6ef96-8b95-11db-a61f-0000779e23...](http://www.ft.com/cms/s/2/5de6ef96-8b95-11db-a61f-0000779e2340.html#axzz2jcPMMnkj)

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

------
hkarthik
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.

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

~~~
czbond
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

~~~
exit
_> 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?

~~~
czbond
I guess I was trying to gramtically incorrectly say that I wasn't some "MBA
without insight into engineering" stating the opinion.

------
j_baker
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.

------
jkarni
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?

------
null_ptr
_“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.

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

Past performance is not indicative of future results.

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

~~~
czbond
Great quote and very true!

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

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

