# Why the Web 2.0/Tech 2.0 ‘Bubble’ Refuses to Burst

In agreement with Marc Andreessen, there probably won’t be a web 2.0 correction for a long time. Right now we have interest rates still at zero, and there is so liquidity in the world right now, so much wealth. Every time web 2.0 is supposed to burst, such as in 2012 following Facebook’s unspectacular IPO, or in 2008, it comes roaring back stronger than ever.

Despite the punditry insisting we’re in a web 2.0/tech bubble, going as far back as 2008, I can only think of three major web 2.0 ‘implosions’: Fab.com, Zynga, and Groupon. Fab was a train-wreck that anyone with a pulse could have seen coming. Zynga…way too dependent on Facebook and a fad. Groupon is the better of the three, only seeing its valuation fall from $30 billion to just$4 billion – but still well over \$1 billion. And for everyone who assumes an IPO is the peak and it’s all downhill, not quite so. Facebook has more than doubled since its IPO; Google is up 1,100% and Linkedin up 150%, to name a few examples.

These valuations, as lofty as they seem, are not falling, and there are several reasons why:

There is a considerable about of wealth is circulating in the silicon valley, and successes tends to beget more success.

Although valuations are higher, fundamentals are also much better than in the late 90’s. The most successful web 2.0 companies have market dominance and huge user bases to monetize for a high profit.

The leading web 2.0 companies (Uber, Whats-app, Dropbox, Snapchat, Instagram) aren’t just flashes in the pan, but are ecosystems harnessing hundreds of millions users. These companies are creating entire infrastructures and industries. Facebook, Twitter, and Instagram pretty created the entire mobile advertising market. Uber is revolutionizing transportation. Dropbox and Box.com are revolutionizing cloud hosting and data storafe. Pinterest, through its pin boards, is like a digital version of a storefront, perfect for its primary user base: women who like to shop.

But the doubters say we’re in a bubble similar to the 90’s. The problem with using the past to predict the future is that there are often subtleties that can produce wildly diverging outcomes. Yes, like the 90’s, prices are high, but the fundamentals are much better and, despite the high prices, markets are much more sober. Fitbit recently went public and week later has a PE ratio of only 25, and that was after a 30% pop on the IPO. If this were the 90’s, it probably would have a PE ratio of 300.

As shown below, while market capitalization is rising, PE ratios are considerably lower than in the late 90’s during the first tech boom:

That why I’m rationally optimistic.

These app & web 2.0 companies seem to be doing something right to avoid the valuation chopping block that afflicted so many of the earlier internet startups. One reason why app companies, as opposed to sites that that sell physical stuff, are doing so well is that they have better profit margins (and less cash burn) from not having to manufacture, market, ship, and store stuff – and can use network effects for added growth.

Profitably has never been the most pressing concern for these growth companies. Amazon went years before turning a consistent profit, so it’s not like there is a well-defined upper-limit where profitability is mandatory. Investors care less about actual profits than the ability to prove profits can be generated. Once it’s demonstrated/proven that profits can be attained, investors become extremely patient. As long as potential profits keep rising (positive cash flow), the enterprise value will rise, and investors will be happy. Amazon, for example, has a very high and growing cash flow, but profits are low because Amazon management keeps reinvesting its cash back into the business:

All the major brands are lining up behind Snapchat, waiting for their ad platform to go live, and it won’t be long before Snapchat, like Facebook and Twitter, pulls in substantial advertising revenue. The mobile environment is perfect for advertising because the screen is smaller and, unlike on a desktop, you can’t as easily avert your eyes from a mobile advertisement. It’s right in front of your face.

For valuations to fall meaningfully, it would probably require a large bear market for the Nasdaq, similar to that of 2000 and 2008. Like Facebook and Google, the most successful app/website companies, such as Snapchat and Uber, are well-insulated from macro factors and would probably only see a small decline in valuation and or delay in going IPO, but this would be temporary. But I am pessimistic about the hardware unicorns (Fitbit, Skullcandy, GoPro, Jawbone) as opposed to the app/website ones, so It’s not like I am emphatically bullish about everything, and these hardware companies would fare much worse during a correction. The fact that hardware unicorns trade at a much smaller multiple than website/app ones is evidence of this vulnerability to macro economic factors, and the general tendency of hardware to be susceptible to fads and change in user tastes.