Sunday, February 13, 2011
The dot com re-boom?
Having seen "The Social Network" for the second time on DVD this weekend got me thinking. With all the attention and news surrounding start up internet companies like Facebook, Twitter, Groupon and most recently The Huffington Post, with their insane buyouts and even more insane valuations reaching well into the billions. Are we re-inflating a bubble that burst almost ten years ago? A burst that was as far reaching as the eruption of the Icelandic volcano with a name that no one could pronounce.
Michael Hiltzik of The L.A. Times poses the question: Are we having a relapse of tech sector insanity?
The last time valuations soared so high for companies with modest track records, or no track records, the trend line heralded the dot-com crash.
By Michael Hiltzik
I am now officially terrified.
Groupon, a coupon-hawking website out of Chicago with less than two years of history to offer, is heading toward an initial public offering that may value it as high as $15 billion.
Facebook, the popular social networking and privacy-wrecking website, is valued at somewhere between $50 billion and $80 billion by private-market reckonings.
So it looks like Arianna Huffington sold herself cheap — she got only $315 million from AOL for her Huffington Post. (Or is it she who acquired AOL?)
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What's scary about all this, you ask? Simply that the last time valuations soared so high for companies with modest track records, or no track records, the trend line didn't herald a "new world" or a "new paradigm" or whatever they're calling it today. It heralded a crash.
Sorry to reopen old wounds, but after years of increasingly insane valuations the tech-heavy Nasdaq composite index topped out at just over 5,000 on March 10, 2000. It never saw that handle again. Today it's still shy of 2,800.
It's not just the numbers that transport one to bygone times; it's the familiar trappings of frenzy. There are the same explanations that what's important isn't actual revenues, but eyeballs, and the lionization of venture investors who thus far have proved themselves wholly capable of shoveling the money out, not yet of shoveling it back in.
Today's golden boy is Yuri Milner, whose Moscow-based Digital Sky Technologies has taken big stakes in Facebook and Groupon, among other firms. A recent article in the San Jose Mercury News contended that Milner has "rewritten many of the rules of start-up investing," although it sounded to me as though he's just a very aggressive venture guy, not unlike the types who used to get written up in the exact same style in the late 1990s.
In fact, Milner has partnered with Ron Conway, a lion of the dot-com era, to invest in start-ups nurtured by something called Y Combinator, which claims to have developed "a new model of startup funding" but on the surface looks very much like what we used to call an "incubator."
The model incubator was Idealab, the Pasadena outfit founded by the entrepreneur Bill Gross in 1996. Idealab is still around, although for some reason its website still brags about founding EToys, which went public in 1999 and bankrupt in 2001. (Like FAO Schwarz and KB Toys, it's now just an appendage of Toys R Us.)
Even today's young entrepreneurs seem like retreads of the start-up founders who used to troop through our offices at The Times showing off their supposedly novel iterations of search engine sites — except that today they're working novel changes on social media sites. They have the same studied scruffiness, the same social maladroitness that contrasts so charmingly with the decor of the four-star restaurants where they're being interviewed for glossy magazines, the same twerpish approach to old-world marketing. (Groupon is still apologizing for its tone-deaf Super Bowl ads.)
All that aside, the numbers are still what count. And by any standard except those of the dot-com boom the valuations being tossed around for social networking sites and other investing flavors of the year look ridiculous.
Facebook's purported valuation on the private marketplace site SharesPost, where insiders can supposedly shop their tied-up shares in not-yet-public companies, reached about $80 billion at the end of January. That made it potentially the nation's second-most-valuable Internet company, behind Google, which has a market cap of about $190 billion.
Facebook recorded revenue of about $1.2 billion in the first nine months of 2010, Goldman Sachs recently told prospective investors. Google's revenue for the same period was $21 billion.
Then there's Groupon, which has been aptly described as an online version of those fat coupon books offering discounts at local shops that are still flogged door-to-door as school and church fundraisers. In what will go down either as the peak of early 21st century hubris or a heck of a canny move, the company turned down a purported $6-billion acquisition offer from Google, opting for an IPO instead.
Is Groupon a good candidate to own the future? No one knows how long the group-coupon craze will last. Thus far, it's been driven by a few eye-popping offers — Groupon made its name with a half-off coupon for Gap back in August, but it was outpaced by a half-off Amazon.com coupon offered by a new rival, LivingSocial, last month. These promotions aren't cheap; either Amazon or LivingSocial took a loss of about $14 million on those coupons, which offered $20 in merchandise for $10.
On the other hand, Amazon owns a $175-million stake in LivingSocial, so maybe it's a wash. If Amazon chalks that loss up to advertising, it comes to all of 1.4% of its annual $1 billion in marketing expenses.
That deal also tells you that Groupon faces lots of competition. It seems every day brings a new social-couponing pitch to my e-mail box; even Facebook is reportedly getting into the act.
What really makes these 2010 deals sound like the second coming of 1999 is that nobody really knows how these companies are performing, because their financial results haven't been subjected to public scrutiny. In the absence of firm numbers, the basis of the frenzy over social media companies is their "story." This one's the "brand leader," that one's got critical mass, a third is moving smartly into Europe.
I've heard it all before. In 1999, Morgan Stanley dot-com analyst Mary Meeker, then dubbed the "queen of the Net," was talking up Yahoo because "it's international … a brand leader on a global basis." This sort of cheerleading had driven Yahoo to a price-to-earnings ratio in the stratospheric 900s by mid-1999. Yahoo's P/E today is about 18.
The frightening thing now is that people are talking about the outsized value of Facebook and other tech upstarts as if their valuations were perfectly normal. That's what we heard about Yahoo and other dot-coms — just before the Nasdaq crashed and made fools of everybody. From the Nasdaq peak to the end of 2000 Yahoo lost almost 85% of its value.
Today's holy grail, of course, is the next Google. The Internet search giant went public in 2004 at $85 a share and hit $700 about three years later. But that's its peak; it's currently in the low $600s.
Anyway, you can go broke fast chasing the next Google — it's like the first hit the smack dealer offers for free, or the blackjack you draw the first time you ever play 21. It's an outlier, and for most investors the prelude to tears, or insanity. Maybe one of these hot companies is the next Google. But it's more likely that these prices are insane.
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at email@example.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.