No. of Recommendations: 38
I was also on the board, as well as Denny S.

Guilty as charged but not quite. Relevant dates:

11/29/1999 - Denny posts Bulls, Bears and Chickens to the Gilder Forum. This is a bubble alert. https://softwaretimes.com/files/bulls,%20bears%20and%20chick...

12/30/1999 - Analyst Sets a $1,000 Target for QCOM: https://www.wsj.com/articles/SB946504678184913770

01/03/2000 - QCOM hits 1000

7/10/2001 - Denny's first post at TMF, at the NPI board: https://boards.fool.com/hi-paul-yes-i-read-all-four-of-moore...

1/25/2002 - Denny's first post at the Gorilla Game board, about browsers: https://boards.fool.com/bruce-sent-via-internet-explorer-5-w...

After 20 years memories become fuzzy. There was a lot to learn from The Gorilla Game that is as valid today as it was then. The dot com bubble really stated around 1995 culminating in 2000. Today there is nothing like it: https://invest.kleinnet.com/bmw1/stats40/^IXIC.html

It would seem like SaaS stocks are in bubble territory but in truth GAAP accounting for SaaS is not comparable to traditional companies. When you built a steel mill the cost of the mill went into the Asset side of the Balance Sheet with only a small part going to expenses each year via Depreciation. With software the cost of developing the software does not go to Asset side of the Balance Sheet, it is expensed as it happens. With SaaS the cost of acquiring long term customers does not go to the Asset side of the Balance Sheet, it is expensed as it happens. If R&D and S&M were to go on the Balance Sheet SaaS would show a profit much sooner.

I highly recommend studying David Skok's explanation of SaaS finances:

David Skok of Matrix Partners: Driving SaaS Success Using Key Metrics

https://www.youtube.com/watch?v=bCBccKfG9U0

For SaaS to reach profitability Revenue, actually Gross Margin, needs to grow vigorously for LTM to exceed CAC and a slow down in Revenue or an undue rise in S&M are the red flags to watch for.

So no, SaaS valuation is not bubble valuation, neither from the price chart nor from the GAAP (CRAP) accounting points of view. You might argue that Price to Sales (P/S) takes care of these GAAP anomalies and P/S are also sky high compared to traditional business. Again there are notable cost differences between steel mills and SaaS.

- SaaS is asset light, not capital intensive
- Open Source reduces the cost of developing software
- Gross Margin is much higher in SaaS
- Paying for talent via stock options shifts the burden from the company to the shareholders offset by stock buybacks which are optional -- payrolls are not optional.

My point is that the metrics that Graham and Dodd used in Security Analysis have changed radically. Do watch David Skok.

Denny Schlesinger
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