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Barron's: Online advertising pie too small to support GOOG, FB. et al valuations


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I remember in '99 a similar article pointing out the absurdity of telecom valuations relative to the entire market. of course they crashed soon thereafter.


To sum up:


Entire online ad market = $134B revenue

Market cap of top players (81% market share) = $724 B


Really interested in others' thoughts on this. I was frankly suprised by it.



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This is a great topic, and gets to the heart of my lack of enthusiasm of all of the Web 2.0 businesses.


A separate but related topic relates to SAAS businesses. There isn't a new industry or new customers being created (big data is an exception, although I would bet that addressable market is wildly overstated among DATA, SPLK, etc bulls).


I think the first internet bubble was easier to fall victim to, since (like railroads, the early auto industry, early telecom, etc) massive amounts of capital were being spent to build out what would become a new industry called the internet.


Here, you've got two new bubbles created among businesses largely stealing share from entrenched advertising media (Web 2.0) or entrenched enterprise software companies (SAAS).

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The metrics they used in that article frankly don't make any sense. What's the point in comparing annual ad spending, which is a flow variable that incorporates monetary value over an arbitrary 365 day period, and market cap, a stock variable?


Most of the $134 bil ad revenue they quoted is very high margin (30% pre-tax) revenue. If companies can make an average 20% net margin then that's $27 billion in annual profit vs. $724 bil market cap for a P/E = 27


If you think the pie will keep expanding at 10% + for a very long period which is a perfectly reasonable assumption, a 27 P/E is easily justifiable.


There are certainly pockets of the internet space that are currently in a valuation bubble but things like Google and Baidu, which operate with huge moats and inherent scalability, seem okay from a valuation perspective.



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Both online retail and online advertising generate a lot of value.  I can see this pie growing.


I actually like that a lot of software companies are coming into the stock market via IPO.  Some of them are wonderful businesses with very high returns on capital.  Many of the management teams are honest people.  They are creating a lot of value.


Contrast that with the mining, oil&gas, and pharma garbage that it is being IPOed.  Many of those businesses have very poor economics and few of the management teams are honest.


(*Disclaimer: I own some mining stocks via Altius Minerals and I don't own any Web 2.0 stocks.)

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