1. His views on the general tech market are somewhat banal (though impressive for someone who was only 23 at the time). It is your standard zerohedge analysis that fed is printing money and it is causing a tech bubble. Can anyone track and connect the dots from fed bond buying to increase in Facebook share price? I don’t think anyone knows.
2. His comments on facebook are much more fascinating though. One thing I did not understand is where all the mobile money on facebook is coming from. Looks like it is from app installs (don’t think FB breaks it out) which in turn is created by VC funding bubble. The VC's fund because they see mobile on Facebook is taking off. Close the loop, classic bubble. So the whole scheme is likely to end pretty badly for facebook (sounds plausible). PG talked about the dot com bubble and the impact of VC funded ad buying that led to increasing market cap for yahoo until it burst
“By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!"”
Edit: I should have guessed, people are more interested in supplying ready made narratives from the past five years for point 1 (which is not that interesting) than point 2. SMH. Some cool narratives are being provided which I heard almost verbatim at various points in the past five years that “explained” how --
1. We will have world wide inflation of epic proportions (reality: world is fighting deflation all over)
2. ECB is doing a great job compared to the fed continuing with QE2 in 2011 (reality: recession in Europe vs the US)
3. Gold will soar through the roof (reality: slump)
4. Oil prices will rise forerver (until they collapsed)
5. House prices in China will go to sky (until they stopped doing)
6. Apple was up 100% in late 2012 (until it collapsed by half six months later)
Etc etc. I would have thought some humility would have set in the “FED is printing, things are inflated to sky crowd”. Nope, just doubling down. Always stay with the narrative explain something else until we get it right ☺. At least I admit I don't know how things work :-).
Consider, there are $20 Trillion dollars of SWF’s in the world investing all over. What is the impact of these as opposed to QE?
> Can anyone track and connect the dots from fed bond buying to increase in Facebook share price?
Sure. Government bonds are defined as risk-free, for better or worse. Regulatory and capital requirements ensure healthy demand for risk-free securities, aside from any "natural" demand for government bonds.
The Fed has pushed down the yields on USG bonds to miniscule levels. Firms which used to rely on a healthy yield for such bonds now have to find that yield elsewhere. The entire point, depending on who you ask, of the Fed's activities is to push investors into riskier securities.
Institutional investors forced into searching for yield bid up Facebooks and Amazons. Simultaneously, you have the more adventurous being pushed into various forms of VC investing. Some investors are desperate for yield, like underwater pension funds, and they won't get it from USG bonds. Think about the recent news regarding pension funds getting into bed with hedge funds. Other investors are sitting on huge cash balances and simply want to put them to work. There is a lot more money sloshing around the system compared to 7 years ago, some of it merely implied by gigantic reserve balances with the Fed, and is there really any question that the run-up in asset prices over the last 5 years is an effect?
> One thing I did not understand is where all the mobile money on facebook is coming from. Looks like it is from app installs (don’t think FB breaks it out) which in turn is created by VC funding bubble.
In July re/code put the App Install Ads at $400-$800m in revenue per quarter. I'd guess it's on the upper-end of that spectrum and is out-pacing other revenue lines. It's not unusual for a top tier game to pay up to $3-5 for a US install.
This is why Twitter is so keen (desperate?) to replicate what FB is doing.
It's not unusual for a top tier game to pay up to $3-5 for a US install.
Yikes, that is much higher than I expected. I'm not really in that particular space, so I guess I shouldn't be surprised. I'm assuming these games are like the new and "improved" Dungeon Keeper that have ludicrous amounts of in-app purchases, so they expect to make back that $3-5 quickly.
I agree quite a bit with him on point 1. Yield starved investors gobbling up more risk to get higher returns in a zero-interest rate policy environment. Also, low risk free rates mean lower costs of capital across the board and I feel that many companies that shouldn't be able to are able to raise more money since investors are yield starved. Also if you're running a DCF analysis on a company, lower risk free rates mean lower discount rates, meaning higher valuations on lower cash flows. Across the markets multiples have been expanding.
On that note, a lot of his commentary seems to be smartly focused on being able to defend valuation outside of the VC universe on a solid EV/sales or EV/cash flow multiple basis. Choosing to go for a lower valuation in the near term makes it easier to argue about revenue growth in the future leading to valuation multiple expansion, possibly making investors more prone to accept price growth.
Most of the apps buying installs are from game companies that have massive revenues (Supercell, King, etc.). It's not the same as the 90s. There might be an app bubble, but it's not a VC driven one.
My gut feeling is the valley has turned sour on fb far ahead of the facts.
These app (especially gaming) companies are profitably running ads on fb. Many of which have spend hundreds of millions on advertising, primarily through fb (by a long shot over Google).
Other genres of apps are starting to migrate to the gaming strategies of acquiring users and increasing retention with ads.
CPMs on fb are rising, not falling.
Brands haven't successfully migrated to mobile advertising as a whole, and when they do I think fb will be the primary choice.
I don't think VC funded negative value ad campaigns are a notable portion of fb revenues.
I would love to be proven wrong on any of these assertions.
Yes. Supercell was $464mm profit on $892mm revenue. The other big IAP game factories are probably similar. Zynga was doing some crazy profits too before they started sinking everything into acquisition
Revenue generation pays for ad spending which generates more revenue. The only thing that stops this cycle is people stop playing and making in-app purchases.
Is it? If they have a large publisher network, they can cross-promote within their apps. The only reason to pay a high rate for an install ad is to gain access to the audience you don't have.
The difference between Facebook today and Yahoo during the dotcom bubble and the investment feedback loop is that Facebook's revenue is already a lot larger than what startups spend on advertising and user acquisition.
A similar argument was made against Bitcoin, that the value was derived from VC investment. When I calculated the figure it turned out that if the total of all VC investment into Bitcoin went towards purchasing coins, it would only have made up 4% of market cap.
You could do a similar calculation with Facebook and user acquisition pricing, although seeing Facebook is at $12B p.a while Yahoo was at hundreds of millions while VC investment is about the same in both periods leads to a conclusion that Facebook is drawing in a lot of new revenue from old ad industry.
>"Can anyone track and connect the dots from fed bond buying to increase in Facebook share price? I don’t think anyone knows."
It's only a "banal" conclusion because it's so blindingly obvious.
Fed drives interest rates down via QE. When bond yields decrease, investors migrate to equities, especially high growth tech stocks.
I've predicted since last year that we are in the midst of a QE-induced asset bubble that will probably pop in early 2017, leading to a 20% pull back. That Spiegel agrees is somewhat vindicating.
2017 is about as soon as the CBs can start returning to some semblance of pre-crash normality. The ECB could, for example, start a QE program soon. That's kind of shocking, even if one understands why.
> Can anyone track and connect the dots from fed bond buying to increase in Facebook share price? I don’t think anyone knows.
Are you willing to bet? :)
Bonds aren't too profitable right now (I hope I don't have to explain why!). Investors therefore seek the next best thing. That's stocks. Facebook has stocks.
2. His comments on facebook are much more fascinating though. One thing I did not understand is where all the mobile money on facebook is coming from. Looks like it is from app installs (don’t think FB breaks it out) which in turn is created by VC funding bubble. The VC's fund because they see mobile on Facebook is taking off. Close the loop, classic bubble. So the whole scheme is likely to end pretty badly for facebook (sounds plausible). PG talked about the dot com bubble and the impact of VC funded ad buying that led to increasing market cap for yahoo until it burst
“By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!"”
http://www.paulgraham.com/yahoo.html
Edit: I should have guessed, people are more interested in supplying ready made narratives from the past five years for point 1 (which is not that interesting) than point 2. SMH. Some cool narratives are being provided which I heard almost verbatim at various points in the past five years that “explained” how --
1. We will have world wide inflation of epic proportions (reality: world is fighting deflation all over)
2. ECB is doing a great job compared to the fed continuing with QE2 in 2011 (reality: recession in Europe vs the US)
3. Gold will soar through the roof (reality: slump)
4. Oil prices will rise forerver (until they collapsed)
5. House prices in China will go to sky (until they stopped doing)
6. Apple was up 100% in late 2012 (until it collapsed by half six months later)
Etc etc. I would have thought some humility would have set in the “FED is printing, things are inflated to sky crowd”. Nope, just doubling down. Always stay with the narrative explain something else until we get it right ☺. At least I admit I don't know how things work :-).
Consider, there are $20 Trillion dollars of SWF’s in the world investing all over. What is the impact of these as opposed to QE?