

The Economist Debates: Are we in a new tech bubble? - bchjam
http://www.economist.com/debate/days/view/710

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tybris
Bubbles happen when everyone realizes there is a gold mine somewhere, but no
one knows how to find it. Some things are overvalued, some things are
undervalued. Usually the gold is in a place where you least expect it.

The Netherlands had two flower bubbles, but not because people where crazy.
People started to realize that this tiny patch of soggy land would one day be
the biggest exporter of flowers and vegetables in the world. Flowers are
clearly worth way more per kg than grain, but how much exactly? No one knows,
but surely those tulips must be worth a lot.

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yesbabyyes
That sounds reasonable. So why did people buy tulip bulbs instead of land in
the Netherlands?

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tybris
Land was being mass produced in the first half the 17th century. My guess is
that people couldn't imagine running out of land because you could keep
reclaiming it from the sea, but they could imagine running out of tulip bulbs.
Thus they undervalued land, and overvalued tulips.

Similarly, during the .com bubble, people couldn't imagine a slightly improved
search engine would be worth anything, but an online grocery store seemed like
a gold mine.

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yesbabyyes
Makes sense. Thanks!

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bh42222
We have had a cheap money policy for way too long now, decades literally. It
is not just US, but also the fast growing developing countries, who all tend
to keep interest rates very low.

We've also had bubble after bubble, after bubble.

Is tech 2.0 a bubble?

1\. Even if it is, it's not nearly as big or stupid as .com 1.0 was.

2\. Oil, gold, a bunch of other stuff, too much money is chasing things to
buy. Is it a bubble of just an early pre-view of what inflation will do to
EVERYTHING?

3\. Some prices certainly do seem extremely speculative, LinkedIn being a
prime example, obviously they are worth something, but are they worth THAT
much?

I think we're in a tech maturing period, that is to say, that if valuations of
a bunch of tech companies suddenly collapse, other tech companies won't be
affected. When tech stops being identical to all other tech, the market has
reached a sort of maturity.

But yeah all markets are acting screwy right now, between a likely default of
Greece and who know else, and 0 or even negative interest rates in the US,
Japan, and the EU.... yeah, we live in strange times.

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netmau5
I've not see Economist Debates before but it looks to be a very well thought
out environment for debate. They roleplay the form of a debate so well that it
inspires courteousness from the general audience. The timetable and structure
of the debate as well as the expert commentary is all very nice.

I'd like to see such a system for political discourse. At the local, state,
and national level, it would be a welcome place to share ideas. If all the
major news organizations are going to keep spewing opinionated journalism, we
may as well take it to the logical conclusion. With opinion should come
debate.

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hugh3
When even the guy making the "against" case opens by saying

 _I am not arguing that Netflix, Salesforce.com and LinkedIn are not
overvalued; I am simply arguing that their valuations have not become
completely divorced from any rational thought. If they have not, we have not
taken a major step towards a bubble._

that's starting to sound kinda bubbly. "Not completely divorced from rational
thought" is kinda on the faint-praise side.

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sabat
Perhaps, but "kinda bubbly" is many degrees of separation from the kind of
"bubbly" that was going on in 1999. So calling this "another tech bubble" is
disingenuous because, frankly, it just doesn't compare in degree of
irrationality.

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mahyarm
So as he basically says, we are probably close to the start of a bubble (the
mania phase).

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c2
It's not a bubble because there's only a handful of companies which are
trading at values which I would consider to be excessive for the underlying
business.

Netflix, Salesforce, Tesla, LinkedIn, and potentially Facebook/GroupOn.

Almost every other technology company is trading at lower then average P/E
values, including for the first time in a long time, Google and Apple.

So is a handful of potentially over-valued companies reasons to call out a
bubble? I'd say no, at any given time there will be absurdly valued companies
trading on any given stock exchange, that probably hasn't changed in the
entire history of the NYSE.

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achompas
Just curious, but what are you comparing Netflix's P/E to? How do you conclude
that Netflix is overpriced?

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ikono
_How do you conclude that Netflix is overpriced?_

I've said this before but anytime a stock is trading at an earnings multiple
significantly higher or lower than average, the burdon of proof should fall on
the person arguing for such a multiple.

Netflix is trading at a P/E of about 75. Right or wrong that should at least
give an investor pause. There is a lot of success already baked into that
price. At this type of multiple a company has to outperform already sky high
expectations in order for an investor to make money(in a fully rational
world). This is possible but it becomes increasingly difficult as that
multiple expands.

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c2
For companies like Linked In with tiny earnings a sky high multiple might make
sense. They only have one or two quarters of profitable business in. But for
companies like Netflix and Amazon, who have sustained growth, revenue,
earnings, and a pretty clear business model, you really have to think about
the magnitude that 70x earnings growth implies.

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ikono
I guess it depends on how you define sky high. LinkedIn is trading at 2100x
earnings according to google finance. Now there are certainly times when P/E
is meaningless and LinkedIn probably is one of them but for a company with no
track record it should give some pause.

The question is are people investing in these companies or are they
speculating about them?

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tatsuke95
Do the arguments that, "there are so few companies with large IPOs" or,
"there's only a small proportion of people buying in right now" seem bizarre
to anyone else?

I mean, the point is to realize the bubble early. When there are 2 tech IPOs a
day and your 75 year old father is buying the hottest Facebook competitor's
stock...yeah, obviously a bubble.

But it's more subtle now, and we have to figure out if it's leading to where
we DON'T want to be. To me, and some other people, it seems so.

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mynameishere
Eh, the boring utility sector has a 18.52 PE, versus 17.47 for technology.
That's not necessarily proof of anything, and even 17.47 is a little high. But
still.

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