Colin Charles Agenda

A bubble or are things different?

I just read this in Bloomberg Businessweek: Silicon Valley Hears Echoes of 1999. Key takeaway:

IPOs were priced at a median of 30 times sales in 2000, compared with 5.2 times last year, the data show. MarketWatch traded at 46 times 1999 sales on its first day, while Rocket Fuel’s valuation was 7.6 times 2013 revenue.

The average age of companies also went up for IPOs – from 6 years to 12 years. That said, the valuation’s have become saner.

For further reading, how do you value a business by Fred Wilson: 

I learned in business school that the multiple of earnings one should pay for a business is roughly the inverse of interest rates. The reason for that is if you buy a business that makes $10mm a year and pay $100mm for it, then you are effectively getting a yield on your investment of 10% (annual earnings/purchase price). This math is terribly simplistic but fine for the purposes of this post. If interest rates are 5% instead of 10%, then you would pay $200mm for the business ($10mm/$200mm = 5%). So the math here is interest rates = annual earnings/purchase price. Again this is very simplistic because it does not deal with the important questions of what interest rate you use, how you deal with earnings that are growing or declining, and a host of other issues. But at the end of the day, this math [annual earnings/purchase price = yield] is fundamental and everything about asset values, capital markets, and valuations stems from it.

I think things are different now. That said, downturns are cyclical.