Price/FAAMG and a defense of seemingly crazy high tech valuations
Hi Packy, always great to read you!
Some thoughts I would love to get your opinion on:
- it could make sense that investors think indeed it's less likely that a company become the next Apple, Google or Tesla as the market get saturated with huge tech incumbent building massive moats. Take the payment industry for instance: when Stripe came up in 2011, the industry was craving for innovators as there wasn't any serious "tech player" there. If you are building a payment company today, you may have to beat Stripe to be the next Stripe (and Adyen, and Checkout.com...), which could be harder than in 2011 (hence lower probability to end up a tech giant)
- what would be interesting would be to consider that all industry could be disrupted by a new tech giant, market-size what is available and compare it to industries already disrupted by tech giant (e.g. search, mobile phones, retail...), and price the missing colossus (and apply the same % chance a given startup become the missing colossus)
- lastly, and I believe this goes nicely with your reasoning, you could say that the FAAMG market cap can be a proxy to their ability to buy/invest in startups (as they do a lot). The reasoning here would be more cash at hand for FAAMG = more pressure to invest = more willingness to accept high price tag for hot startup. Thus the question could come down not to "will this startup be a tech giant?" but rather "will this startup interest a tech giant?" with similar effect on valuation being correlated to FAAMG market cap (see Fast.co for instance).
Thanks Packy, amazing read and a new perspective that helped me put some of these valuations in perspective.
I'm also a big Nikola skeptic, but its $8b valuation implies a 1/100 chance they could become the next Tesla, which does not seem completely absurd (but of course one could argue TSLA is also largely inflated). I guess it then comes down to what your "anchor" is and how much you trust that valuation.
Great to try a new perspective on valuation upside - I think the percentage chances however underestimate the extraordinary achievement and right-time right-place of the FAAMG examples. I feel the chances are much lower for the less mature - however the high potential returns can still justify high early valuations; just don't do it because there's e.g. 1/100 chance by virtue of the valuation. Increase the upside and lower the likelihood to better reflect the risk.
mostly agree, would add that today it seems impossible for their to be a systematic bubble due to the fact that it’s bascially impossible to get a majority of people to agree on anything, take our political climate as a proxy
Thank you, I did not understand the 1/770 clubhouse Facebook relationship...
Excellent read. Makes a lot of sense