Tuesday, September 9, 2014

Dot Com Bubble 2.0—–Lunacy By The Numbers

By David Stockman

Thanks to the money printing mania of the world’s central bankers, the Wall Street casino has gone global. Accordingly, mindless speculation and momentum chasing have reached new absurdities, as exemplified by
the red hot roster of international high flyers below.

The financial data for the top name on the list, Twitter, is all that is required to remind us that once again markets are trading in the nosebleed section of history, rivaling even the madness of March 2000. Currently, Twitter (TWTR) is valued at $31 billion.That’s 18X revenue, but the catch is that the revenue in question is it’s lifetime bookings over the 18 quarters since Q1 2010.

When it comes to profits, the numbers are not nearly so promising!  For the LTM period ending in June, TWTR booked $974 million of revenue and $1.7 billion of operating expense. That why “NM” shows up in its LTM ratio of enterprise value to EBITDA. It turns out that its EBITDA was -$704 million. In fact, its R&D expense alone was 83% of revenues.

That’s not the real fantasy, however. The sell-side hockey sticks indicate that TWTR’s forward multiple is only 86.6X projected EBITDA.  Let’s see. At its current total enterprise value, this implies it will generate $350 million of positive EBITDA in the next 12 months—or a $1 billion favorable swing from the LTM number.

Just say its going to take some doing—not to say a miracle. During Q2 EBITDA was -$104 million compared to -$13 million in the year ago June quarter. So TWTR’s cash profit numbers are marching to the rear at a furious pace, but never mind. It’s EBITDA will soar skyward any moment now, making it 86.6X forward multiple completely rational….. Right.

Needless to say, this kind of speculative lunacy would never occur on the free market under a regime of honest price discovery. Yes, markets would discount at hefty multiples the future value of unusually promising and innovative enterprises with demonstrated capacity to convert revenues into profits.

Thus, a 5% free cash flow yield might make sense for an especially solid and promising new enterprise. In that event, a $31 billion market cap would require EBITDA less CapEx in the range of $1.6 billion. Alas, it is not clear that TWTR will ever even generate that much revenue, let alone free cash flow—of which, so far, it has generated exactly none.

So the list below is mainly a throw-back to the dot com mania. Today’s equivalent of eyeballs are now being discounted at absurd multiples. In the case of TWTR, its valuation is being driven by hundreds of millions of account holders—a significant fraction of which are fake.

And perhaps that is the appropriate metaphor. The wild valuations shown below are the product of a fake market—a pure gambling casino that is being fueled by a worldwide money-printing craze that has no precedent in recorded history.

The cynic is likely to say, so what? The gamblers will take their lumps, and probably soon enough. But its not that simple. The serial bubbles created by the central banks cause vast malinvestments and deformations—-economic distortions which confer stupendous, unearned windfalls on some and arbitrary, wanton losses and penalties on others.

Just consider the implications of TWTR’s LTM financials. Its SG&A expense for that period was $657 million or about $350,000 per average employee over the period. Needless to say, this tsunami of money is not being earned from sales; its being burned from the proceeds of serial capital raises that have accompanied the skyward ascent of TWTR’s valuation in the venture capital and post-IPO casino.

As for the windfalls, the gigantic, if temporary, gains of options holders are obvious enough.  But how did the average price of a home in San Francisco rise to north of $1 million? How is it that moderate income tenants are being flushed out of rental units via every lawyer’s trick in the books? Why are traditional small businesses throughout the city closing-up shop owing to soaring commercial rents?

Any day now, this third and greatest bubble of the 21st century will reach a boiling point that even the mad money printers in the Eccles Building will not be able to sustain. Then there will be another thundering financial market crash—with collateral damage ricocheting willy-nilly in every direction along main street.

And that’s the real evil of Keynesian central banking. During the extended process of bubble inflation, the free market’s normal mechanisms which check unbridled speculation—such as short-selling—are disabled and eventually banished from the casino. Accordingly, bubbles grow to elephantine magnitudes under the malignancy of free money carry trades and one-way markets. In their wake, they channel massive flows of capital and real resources to blatantly uneconomic and often destructive purposes.

At the end of the day, free money is the mortal enemy of free markets. And free money is the catalyst for rank speculations that value imaginary cash flows at 87X…..that is, before the high flyers come crashing back to earth, like they always do.

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission. 


  1. For the New York Condo Owner With Everything, a Million-Dollar Parking Spot

    The parking spots, some of which will be a generous 200 square feet, will run $5,000 to $6,666 a square foot, whereas the nine three-bedroom units upstairs will cost between $8.70 million, or about $3,170 a square foot, and $10.45 million, around $3,140 a square foot. Monthly common charges for operational expenses for the three-bedrooms will run as high as $8,880 ($18,360 for the $25 million duplex penthouse). But the parking spots, which also provide a bit of storage space and a charging station, if not views, will not rack up additional monthly charges.

    In Manhattan, where luxury condominiums and their lavish amenities have been commanding stratospheric prices, the million-dollar parking spots are strategically priced. The median sales price of a Manhattan apartment has been tickling the million-dollar mark, reaching $920,000 in the second quarter of 2014, while apartments at the ultrahigh end have been selling for more than $90 million.

    “We’re looking at setting the benchmark,” said Shaun Osher, the founder and chief executive of the brokerage firm CORE in Manhattan, which is handling the sales and marketing at 42 Crosby. “In real estate, location defines value and parking is no exception to that rule.”

    In SoHo, Mr. Osher said, there are “few to no options” for parking, let alone a private spot in your own building.

    The number of off-street parking spaces in the city was 102,000 in 2010, or about 20 percent less than in 1978, when there were 127,000 spots, according to the Department of City Planning. While scarcity is a factor in the price of parking, $1 million for a parking spot may still be a reach.

    Last year, a private garage with space for two cars at 66 East 11th Street was listed for $1 million by the Manhattan real estate firm Delos. It is still available in conjunction with the sale of the building’s $50 million dollar penthouse. In April 2012, a parking space at 60 Collister Street, a loft condominium building in TriBeCa, sold for $345,459.

    Over the past year, residential parking spots in Manhattan have been selling for an average of $136,052, according to Jonathan J. Miller, the president of the appraisal firm Miller Samuel.

    Most ultrahigh-net-worth individuals have car collections as well as service vehicles for their staff,” Mr. Hannah said. “Parking is in serious demand and has proven an excellent investment with no sign of a decline.”


  2. Well David Stockman thank you for sharing it with us (TWTR)Dot Com Bubble 2.0—–Lunacy By The Numbers