What is Spotify Worth?

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Note: This Analysis was conducted prior to the release of Spotify’s Q1 Earnings Results.

Overview

  • Spotify is an interesting company and market leader in a recently resurrected and growing industry.

  • The stock is overvalued using traditional DCF valuation, as well as a unit economic based subscriber Valuation.

  • Using sensitivity analysis, the greatest lever the company has is Paid user growth. more users increase network effects which benefit Spotify's suppliers, creating a positive feedback that further benefits users.

 

Spotify is an incredibly compelling company, having helped raise the music industry from the ashes after the internet enabled widespread piracy and unlicensed forms of consumption, dramatically reducing revenues. I am a Spotify paid subscriber and love the service, so my hope was that the various valuation methods would point to an undervalued security that I could be happy scoop up.

What the analysis suggests, however, is that there are significant growth assumptions priced into the stock that I have a hard time agreeing with, or in which I lack enough conviction to warrant investing. One unintended outcome was a reinforcement of the idea that traditional DCF analysis is not appropriate for some companies, Spotify included. As Bill Gurley argues, it is difficult to predict with any accuracy what the long term cash flows will be for a company that is relatively young or one with a new business model, and I’d argue Spotify qualifies as both. My DCF analysis values the company well below the current market price, but for reasons I just mentioned I have some concerns about the accuracy of the output.

As an alternative I valued the company using a subscriber model, which calculates the unit economics as the user level and then arrives at a valuation by assuming some trajectory of user growth. Using this method I came to a valuation higher than the DCF calc, but still below the current market price.

Lastly, I approached the valuation analysis in reverse, adjusting my assumptions up or down 25% to determine what levers Spotify has and which of those when pulled will positively impact the business the most.

My Excel model is available here.

Company Overview and Financial Performance Summary

Company and Product

From 1999 to 2014, the recorded music industry faced continuous headwinds in the form of a movement from physical formats to digital, with revenues declining 40% over that period. In 1999-2002, illegal digital distribution increased in large part due to the rise of Napster and later the likes of Kazaa, Limewire, and YouTube. Music consumption didn’t decline, but revenue did because users could now access the content for free (illegally) and in an unbundled way (download one song as opposed to the whole album).

 Source: IFPI

Source: IFPI

Spotify was “founded” in 2006 but launched its first product iteration in 2008 and mobile app in 2009, a fortuitous time to enter the space. Crackdowns of illegal platforms left consumers with market options that either had poor UX, or were unsafe from both legal (piracy = illegal) and digital security (downloads came with the risk of viruses) perspectives.

Incumbents Pandora and Soundcloud were already successfully streaming music to customers, but had different strategies. Pandora went with a fully (mostly) ad supported model and Soundcloud wasn’t making money, but Spotify was the first to offer a paid subscription model, allowing users to access any music in any quantity for one set price.

Fast forward to today - Spotify makes money two ways, by advertising revenue generated from ads displayed (and played) to users on the free tier, and by charging users a fee to use the premium service. On the flip side, Spotify’s main cost is the fees it pays to license out the content from music labels (mainly Universal, Sony, Warner, and Merlin), which equates to around 80% of revenues.

Historical Performance Overview

Revenue

Spotify generates the majority of its revenue from subscriptions (90% in 2017) with the remainder coming from ad revenues (10% in 2017). Revenues grew at an impressive 53% CAGR from 2013 to 2017, although YoY growth dropped to 40% in 2017 in USD and has declined each year since 2015 in EUR.

 Source: Spotify F-1

Source: Spotify F-1

Cost of Revenue

Cost of revenue is made up primarily from royalty and distribution costs paid to music labels and publishers in exchange for the right to stream content to users. As a result of new licensing agreements entered into in 2017, Spotify was able to lower their cost of revenue percentage to just under 80%.

 Source: Spotify F-1

Source: Spotify F-1

Operating Expenses

Outside of Cost of Revenue, operating costs as a percentage of revenue have been increasing since 2015:

 Source: Spotify F-1

Source: Spotify F-1

KPIs

Monthly Active Users have been steadily increasing for both paid and ad supported tiers.

 Source: Spotify F-1

Source: Spotify F-1

With an increase in users, total aggregate content hours consumed would be expected to increase, but Content hours per user is also increasing, meaning that on average, each user is increasing time spent listening.

 Source: Spotify F-1

Source: Spotify F-1

Churn has been steadily declining since Q1 16, which the company attributes to increased engagement from new features as well as adoption of higher retention products like their Family Plan. The company also states that “Based on historical data from the beginning of 2015 to date, approximately 40% of the Premium Subscribers who churned rejoined within three months, approximately 45% rejoined within six months, and 50% rejoined within 12 months” which means that true churn is lower than the reported 5%-7%.

 Source: Spotify F-1

Source: Spotify F-1

DCF VALUATION

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Summary

I assume YoY growth slows over the next 10 years to a terminal run rate equal to the long term risk free rate. I assume margins improve, flipping to positive by year 5 and trend towards the industry average by year 10. Using a cost of capital of 9.24%, I value the equity of the business at $94 per share, which at its current price of $159, SPOT is overvalued based upon discounted cash flow analysis.

Assumptions

Revenue Growth: Revenue has grown at a CAGR of 53% from 2013 - 2017 but as expected with most companies that achieve scale, YoY growth has been declining for the past two consecutive years with 2017 at 39% EUR and 41% USD (fx rates are the cause of the difference). I assume total growth rates continue to decline, less quickly over the next 5 years and then more rapidly as competitor offerings catch up and market saturation increases.

 Source: Actuals from Spotify F-1

Source: Actuals from Spotify F-1

Are these growth rates reasonable? According to Goldman Sachs estimates, by 2030 global streaming revenues will total $34 billion, with paid subscriptions accounting for $28 billion and ad revenues the other $6 billion.  In the prospectus, Spotify states that their “global streaming market share was approximately 42% in 2016 as determined by revenue” which would put the global streaming market at $7.8B - $7.9B, larger than $4.7B estimated by IFPI.

Assuming IFPI and Goldman are accurate, then a linear interpolation between those two datasets would put total global streaming revenues 10 years from the base year at roughly $27 - $28 billion by 2027. At my growth rates of 33% next year trending lower to 18% by year 5, and then steadily lower going forward, that puts total Revenues for Spotify at $23.7 billion by 2027, which would equate to ~85% of all global streaming revenues.

Given that in 2016 Spotify’s global market share was around 42% (according to the company), combined with the traction that Apple music has seen of late and the continued success of the likes of Tencent Music and Amazon, 85% global market share seems highly improbable.

 Source: IFPI, Goldman Sachs

Source: IFPI, Goldman Sachs

How do I reconcile this? I think the IFPI data is understated (both MIDiA and Spotify’s estimates of 2016-2017 streaming revenues are larger than IFPI) and the Goldman Sachs estimates are conservative.

Over the past 20 years the music industry has felt the pain of disruption and evolution from physical sales to the format that will dominate for the foreseeable future in streaming. Until recently music was consumed through a mixture of formats that were all lacking in one way or another - none had the complete package of fully comprehensive catalogs of licensed content (Soundcloud and YouTube were mostly unlicensed), a high quality UI (none were great), and portability via the internet (physical formats were limited by what you could carry with you).

Because of streaming, any user with a connected smartphone or computer can access nearly any piece of recorded music via an enjoyable UI for relatively cheap. And yet as of today, global streaming subscribers only total less than 200 million, and while the number of global MAUs of streaming services (which include users on the ad supported tiers) is larger, it is still a fraction of the 3.6 billion internet users globally. Consider that even after several years of strong growth due to streaming, global music revenues are only ~75% of what they were 15 years ago.

Because of this, I believe there is a much greater chance that global music revenues will be larger than Goldman’s estimates in 10 years as opposed to smaller.


Operating Margin: Operating Margin has been negative since 2013, but improving in 2017 due to restructured royalty and distribution agreements. S&M, G&A, and R&D are all increasing as a percentage of revenue, a step in the wrong direction if the company has profitability as a goal.

Improvements in cost of revenue is the largest lever but the one over which Spotify likely has the least control. Universal Music Group, Sony Music Entertainment, Warner Music Group, and Music and Entertainment Rights Licensing Independent Network (“Merlin”) account for more than 2/3rds of global market share and platforms like Spotify are dependent upon those rights, for without them there is no product to offer users.  The platform with the largest catalog is in the best position to win over potential new users, and because of this need, the record labels have the leverage in the negotiations. As streaming becomes increasingly ubiquitous and new competitors enter the market, this leverage will only increase.

I assume the company successfully moves to profitability in the next 5 years with a combination of improvements in SG&A spend and potentially better licensing deals. By year 10, I assume the company operates at an industry average operating margin of just over 13%.

Other assumptions: I assume the company will continue to reinvest cash generated into the business at high levels in the early years, and lower levels in later years as the company matures.  I have converted R&D operating expenses to CapEx from the view that research costs are intended to produce future growth and thus are more like an asset that should be amortized. Because the company has no debt, no operating leases that could be considered long term debt, and no preferred equity, the cost of capital is equal to that of the equity, which I estimate at 9.24%.

Subscriber Model Valuation - “DCF for Hipsters”

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Summary

The subscriber model has many more assumptions than the DCF (which I’m not sure if that makes it more or less accurate, but more on that another time), but in a nutshell I am assuming churn continues to decline slightly, customer acquisition continues to slow YoY, content costs decline but level out at ~70%, and both ad revenues and corporate (non content) costs grow but at a declining pace.

I arrive at a value per share of $115, which is above the simple DCF but still below the current market price of ~$159.

Assumptions

  • Lifetime duration of average customer: 15 yrs. At a churn rate of 5 per year, that would suggest a tenure of 20 yrs (1/churn), but because there are very few consumer technology services (especially in the content space) that last more than 10-15 yrs, I went with 15yrs.

  • Revenue per Subscriber (and growth of): Equal to 2017 avg of ~$78, growing at the rate of inflation. The part I feel the least comfortable about here is the growth. Increasingly evidence points to improvements in technology over the past couple decades being deflationary (increasing output/value at constant price), and a reduction in cost-push inflationary pressure due to the removal of distribution costs across the music industry because of the internet doesn’t help.

  • Content Costs per Subscriber: Declines from current levels towards 71% by year 10 as licensing deals with record labels improve. This one is hard to predict. On one hand, as Spotify grows and increases market share, so does its negotiating leverage to reduce costs, which it has started to prove it can do. On the other hand, as competition increases, Spotify’s leverage decreases because the record labels can pull their content and sell to the other platforms, to Spotify’s detriment.  As market leader of the streaming category, which will surely be the record label’s primary source of revenue in the future, I am willing to bet there are more concessions to come on the part of the labels, albeit not many.

  • Customer Acquisition and Churn: Acquisition steadily decreases from existing levels to 10% by year 10+. Churn declines slightly in the near term as Spotify continues to improve the customer experience but increases over time as competition increases.

  • Strong customer acquisition has accompanied quarters in which Spotify offered heavily discounted trials, but acquisition totals outside of those quarters was much lower.

 Source: MIDiA via musicindustryblog.wordpress.com

Source: MIDiA via musicindustryblog.wordpress.com

 

  • Inactive subscribers (paid subscribers plus ad supported users minus MAUs) made up a small percentage of the total in 2017 but grew 4x from the beginning of 2016, a trend worth watching.

  • The long term acquisition growth at year 10 is one of the main reasons that the subscriber model produces as valuation larger than the DCF, but in a universe of 3.6 billion global internet users, I don’t think 10%+ growth is unrealistic and in fact, the lower long term growth in the DCF is more to prevent crazy permanent growth after the terminal year.

 Source: Actuals from Spotify F-1

Source: Actuals from Spotify F-1

  • Advertising Revenues: Growth is fairly strong, averaging nearly 30% per year in the first 5 years and declining to 10% by year 10. The longer term shift towards programmatic channels should continue and audio formats should benefit.
  • Corporate Costs: Growth declines from the recent 50%+ YoY levels to a more reasonable 10% by year 5 as the company focuses on profitability

 

Reverse DCF Analysis

Using my assumptions as baselines and adjusting various inputs while holding others constant derives what levers are available to Spotify and which will produce the most outsized results.

  • Lifetime duration of average customer

    • Assumption: 15yrs

    • Adjusting up 25% to 19 yrs changes valuation by: +18%

 

  • Content Costs Per Subscriber

    • Assumption: Current level of 78%, declining to 4% by year 5 and long term level of 71% by year 10

    • Adjusting costs down 25% to 53% by year 10 changes valuation by +101%

 

  • Churn Rate

    • Assumption: Declines to 4% in the next couple years then increases as competition increases, hitting a long term level of 5.5% in line with recent years

    • Adjusting churn down 25%to a long term level of 4.1% changes valuation by: +23%

 

  • Acquisition Rate

    • Assumption: Declining from 38% in year 1 to just under 10% by year 11

    • Adjusting up 25% to arrive at 12.5% growth by year 10 (thus increasing all growth rates in between year 1 and 10) changes valuation by: 107%

 

  • Ad Revenue Growth

    • Assumption: 35% initial YoY growth declines to 10% by year 10

    • Adjusting growth up 25% changes valuation by: +5%

 

  • Corporate Costs

    • Assumption: Costs continue to grow at 20%-40% over the next several years and hit a long term rate of 5% by year 10

    • Adjusting costs down 25% changes valuation by 26%

Commentary

As suspected, the two largest levers to improve the valuation are content costs and growth rate of acquired users - the former because of the impact on free cash flow, the latter because of the effects of compounding.  One of these levers Spotify has little to no control over (content costs), the other is well within their gift to positively impact (user growth).

As a platform business, Spotify has built a competitive advantage by leveraging network effects - Spotify generates incremental revenue for the record labels and artists with each additional revenue generating user, thus strengthening their negotiating position to both reduce costs and expand their content library, which in turn they can use to lower prices while offering an increasingly wider selection  for consumers.  Because of this, and because they currently have a positive LTV to CAC, they should rightfully run cash flow negative, plowing cash back into user growth to widen their moat.


 

ReSources

I built my valuation models utilizing the methodologies of Aswath Damodaran and for this piece used the following resources:

  • Spotify F-1
  • Goodwater Capital Spotify Thesis (http://www.goodwatercap.com/thesis/understanding-spotify)
  • Stratechery.com
  • IFPI State of the Industry Report
  • MIDiA Estimates
  • Goldman Sachs Research

 

Why Amazon Will Be an Advertising Company in 5 Years

 Image via searchengineland.com

Image via searchengineland.com

Ask most people what Amazon does and they will tell you that Amazon runs an online marketplace for everyday stuff. Fewer will mention that Amazon is also a cloud computing company, arguably the most dominant cloud computing provider today with Amazon Web Services (AWS). And even fewer still will be able to tell you that in addition to e-commerce and cloud computing, Amazon is an advertising company, and not a small one - according to eMarketer, Amazon will earn about $1.65 Billion in net digital ad revenues this year, making it the fourth largest digital advertising company in the US, and fifth largest in the world.

The same competitive advantages that have allowed the company to quietly overtake the likes of Twitter, Snapchat, and others - its position as a destination for e-commerce and the robust dataset of consumer intent that comes with it - will power its continued ascension to eventually challenge Google and Facebook for the lion's share of digital advertising dollars.

To better understand where Amazon is headed, let's first look at what they are doing in the digital advertising space today.

Product Search

Yes, people most often use Google to search, but when it comes to searching specifically for products, Amazon is the preferred destination.  According to 2016 data from BloomReach, 55% of consumers begin their search on Amazon when shopping for products online, up from 44% in the prior year.

In the world of retail, Amazon is unavoidable. Even when consumers find a product on another retailer's site, 9 out of 10 times they will still check Amazon, according to BloomReach. Amazon's reach even extends to brick and mortar - CPC Strategy research reported that Amazon is the most likely place for in-store shoppers to compare prices while they shop.

People go to Amazon to shop for things.  When they get there, Amazon can collect information on what products they are looking at, where they navigate to and from, their buying habits, buying history, and from all of this they can deduce what people are in the market for and likely to buy.  To a brand or advertiser, this is incredibly powerful information, allowing them to target people who are most likely to buy their product, increasing the ROI of their advertising budgets.

Amazon for Advertisers

Currently Amazon offers advertising solutions through several different channels. Amazon Marketing Services (AMS) offers keyword targeted search products on a cost-per-click basis that only link to products in the Amazon platform. Amazon Media Group (AMG) offers display products both on and off Amazon's properties for brands looking to drive awareness. And lastly, Amazon Advertising Platform (AAP) is the company's Demand Side Platform offering, allowing advertisers and agencies to programmatically by digital ad spots and manage campaigns in an automated fashion.

As it stands today, most of the ad spend is concentrated on Amazon properties, but imagine if brands and agencies had access to the incredible wealth of Amazon's customer data and could use it to target consumers across all forms of digital media, outside of Amazon's platform. Amazon understands this is a compelling proposition to brands and agencies that are advertising across the web and that it is a potentially large source of additional revenue that can be generated by simply leveraging their existing data, which is why they have taken steps to capitalize on the opportunity by riding the wave of disruption that has occurred in digital advertising over the past 2 years.

Amazon for Publishers

Those outside of the advertising technology space are largely unaware of the massive shift that has occurred in programmatic advertising recently, rocking many boats and sinking even more. Header bidding, a technology that allows publishers to circumvent a long held positional advantage by Google's ad server called Doubleclick For Publishers (DFP), leveled the playing field for ad tech partners letting them compete on an even playing field for the first time and in the process boosting revenue to publishers (web sites). 

With this shift in technology, Amazon saw an opportunity to embed itself in the plumbing of the broader web and launched its own Header Bidding solution for publishers. In most cases, publishers only use one Header Bidding solution in their technology stack to manage the real-time auction process, called the wrapper, and allow advertisers (or pipes to advertisers) to plug-in to the wrapper using what are called adaptors.

Because the wrapper manages the auction process, it can capture an incredible amount of information on who is visiting the website via their cookie, as well as advertiser bidding behavior. As the wrapper solution, Amazon can match their proprietary consumer data with cookie data, allowing advertisers to target viewers that they know are most likely to buy a product, on web pages outside of the Amazon platform. The magic for Amazon in this setup is that they make money from the Advertiser, taking a cut of spend, and from transacting the real time auction for the publisher. Should the visitor of the website then also buy the product on Amazon they can even calculate attribution, or which advertisement/campaign drove the sale, which is the holy grail in the advertising world.

Existing Setup - Amazon can only overlay its customer data on spend within its own platform:

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Future Setup - Amazon leverages its consumer data to capture ad spend outside its platform:

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In a relatively short time, Amazon has seen significant traction with their wrapper solution - According to a ServerBid October 2017 report on header bidding trends across the top 1,000 US websites, 18% of websites included in the study use Amazon's server-side wrapper today, with the next largest server-side competitor at just 1.5%.  

Available Market

According to eMarketer, by 2019 Digital Ad Spend will total $105 Billion, growing 15%+ annually and continuing to take market share from legacy advertising channels. Facebook and Google combined will account for roughly 2/3rds of that pie according to eMarketer estimates, leaving over $30B per year in available market. 

How much of this market could Amazon capture? Given that the digital publishing world is moving towards a technology in which Amazon is clearly the market leader (i.e., server-side header bidding), they are in a favorable position to capture additional market share. Combine that with the reality that digital advertising is a business of data, and Amazon has the largest and most robust set of consumer data, their situation is increasingly advantageous.

The beautiful part of this business model for Amazon is that because it is essentially just leveraging existing data from the amazon platform, there is little capital investment required and few costs needed to maintain the revenue streams. In other words, this is a very high margin business for a company that notoriously operates at little to no margins.

If we assume they capture a quarter of the roughly $34 billion available market, or $8.5 billion, and operate at roughly the same gross profit margin as another major search ad company, Google, of roughly 60%, then that equates to an additional $5.1 billion gross profit per year, or an additional 8% on top of current year's gross profit estimates. At Google's operating profit margin of ~50%, Amazon would be adding 28% to its current year estimated operating profit.

Predicting trends in technology 5-10 years out is a fool's errand, and even if successful, advertising might not be the core revenue stream for Amazon, but these estimates above are only for 2019. Every year more advertising spend shifts from old world legacy formats like print and television to digital, and advertisers continue to become increasingly data driven with their spend. If you extrapolate those trends out 5-10 years and factor in Amazon’s advantageous position to capture significant market share, you have a recipe for a 3rd major advertising company alongside Google and Facebook.

Stop Your Bubble Talk

People love to talk about bubbles. They love it. “Are we in a bubble?” is thrown around across all forms of media, most likely because it sells, but being an empiricist there is a point where I can’t take it any longer.  When I see an article like this post in Vanity Fair, in which the majority of the arguments in favor of a Tech bubble involve ideas like “tech companies are full of themselves” or “construction of super tall buildings presage a collapse” or any other unverifiable ad hominem attacks, I can’t help but speak out and bring up empirical data.

Putting aside the more absurd arguments like “There’s also a precocious indicator some economists refer to as the Prostitute Bubble, where the filles de joie flock to increasingly frothy markets,” let’s dissect some of the other points and in doing so try to get an idea for whether the Tech market really is in a bubble.

Inflated Art Market

This chart from Concordius Advisors, which shows how various art indexes have either appreciated in line with or underperformed the S&P (light dotted line) since the early 70’s, should put a damper on the idea that an art prices are overly inflated:

The NASDAQ recently closed at an all time high.

All time highs do not foretell major crashes and recent lows do not mean the market is headed higher.  The problem with this argument is that an index level is simply a price, and not an indication of value. Bubbles occur when valuations become over inflated. The ratio of the price per share of a company’s stock to the amount of earnings per share it generates is called a price-to-earnings ratio, which is an indication of value (the higher the ratio, the higher the price per the same amount of earnings). If we look at the NASDAQ’s price to earnings ratio over the past 20 years or so, or more specifically the S&P IT Index, we can see that the increase in price has been driven by increasing earnings and not because of overly exuberant valuations: 

 Source: Andreessen Horowitz

Source: Andreessen Horowitz

All New Startups are Glorified Distribution Companies

This is true for some, but not in the traditional sense like a Dominos (to which the author compares them all). Whether it’s people (Uber/Lyft), goods (instacart), hotel rooms (airbnb), office space (wework), creative content (snapchat), documents (docusign/dropbox), or even services (taskrabbit), these companies are utilizing the new cloud based and mobile ecosystem to either solve distribution problems or make more efficient various outdated distribution channels.  

Prior to the smartphone, distribution endpoints were static and the long standing distribution channels used in delivery had been sufficient for generations.  For the past 50 years people turned to taxis for rides, consumed creative content and news from television networks and newspapers, and looked to hotels for lodging.  Mobile smartphones have fundamentally changed the point of consumption and method for distribution, as we can now consume content, request rides, and order goods or services to or from a mobile device instantaneously. And most importantly, many of these services are actually value adding as opposed to being merely tack-on gimmicks.  This new ecosystem has offered an opportunity to allow the transfer of goods or services from an origination point that always existed to a consumption point that is now fluid and changing, using technology that has enabled constant, widespread connectivity. 

So, to say that because these companies are solving distribution issues they are either overvalued or fundamentally flawed as a business, is both ignoring the changing technological landscape and completely erroneous.

Programmer’s Wages are Overinflated

In a recent story from CBS, over half of the top 9 highest paying entry level jobs were software or web related. While it’s true that these types of jobs pay more than average, whether this is because of an overinflated tech market or because the nature of the industry and the function of the job, is a different matter. Consider the fact that Walmart, who employs 2.2 million people, generates roughly the same amount of Net Income as Google, who employs only 57,000 people. Because the profit per employee is so much higher at Google, the cost per employee (wages) follows suit. And because Google is not alone - because of the nature of their product/service, most IT companies generate higher net income per employee - I would argue that the relatively high wages paid to those in the IT industry are due to scarcity of technical talent and the nature of the industry.

The Real Arguments

In the Vanity Fair piece, the author states that Marc Andreessen’s main argument against the idea of a bubble is based “on the fact that it hasn’t popped yet.”  I guess he didn’t see the 53 slide presentation that Andreessen Horowitz published in June that was actually supported by data and explained in great detail why their firm doesn’t believe there is currently a tech bubble. 

First, they argue that the market size is large and real as opposed to in the previous internet bubble:

 Source: Andreessen Horowitz

Source: Andreessen Horowitz

Second, the amount of tech funding has shifted from IPO’s back in the bubble of 1999-2000, to late stage private deals.  Why is that important? Because retail investors, who could have little to no knowledge about a company can buy that company’s public stock on or after an IPO, which many people did solely based on hype. Late stage private investors are limited to large institutional funds, Venture Capital, and Private Equity groups - essentially what should be more qualified and knowledgeable investors who are less subject to investing based on tips they heard at a cocktail party.

Compared to older legacy tech companies like Microsoft, Apple, or Oracle, tech companies these days are waiting much longer until they have higher revenues to go public:

  Source: Andreessen Horowitz

Source: Andreessen Horowitz

And the number of tech companies going public is flat to down:

 Source: Andreessen Horowitz

Source: Andreessen Horowitz

Overall Tech funding as a percentage of technology GDP is also flat to down, meaning that we aren't seeing a surge in money being poured into Tech at a rate that outpaces Tech earnings:

 Source: Andreessen Horowitz

Source: Andreessen Horowitz

To summarize, the valuation of public tech companies is flat in recent years, more sophisticated players are investing in private tech companies that are waiting longer with more revenues to go public, and as a percentage of output tech funding is flat to down.  

So I ask, where is the bubble?

The Fundamental Shift in the Value of a Home

Until recently, owning residential real estate provided no inherent source of revenue to the average home owner and potential to create wealth from the property was mostly limited to the appreciation in the value of the home. Airbnb and Homeaway have changed the value proposition for owning residential real estate, and in doing so have altered the real estate landscape nationwide. 

Battle of the Chats

Battle of the Chats

Snapchat vs WeChat

Lately much has been written about the valuations of the so called ‘Unicorns,’ or private companies (typically VC backed) with greater than $1billion in valuation. The list of unicorns is dominated by technology companies who, aided by cheap and flexible cloud based technology, have been able to build scalable, high growth business.  As of its last funding round in May of this year, Snapchat, the auto-expiring photo sharing app company, was valued at $16 billion.  People can argue all day about whether or not such a lofty valuation is warranted as a standalone business, but when compared to WeChat, differences in nearly every aspect of their respective services become startlingly apparent.