Eric Schmidt: You Don’t Know It’s A Bubble Until The Bubble Ends

So, Mr. Schmidt. Do you think there’s a bubble?

You can call me Eric.

Is there a bubble? And in fact how does that make you look back on your own IPO a few years ago?

Oh, we under priced! That was a joke, that was a joke, that was joke. Don’t, don’t, don’t quote me please. Okay, so the question was, question is, is there a bubble?

Yeah, exactly.

Is that the same question you asked? Or did you ask a different question?

Yeah, and I was also gonna ask if Google benefits from a lot of money going in because people buy more, at least startup businesses are being Adwords customers.

Right. That is a good question.

That is a good question.

Yeah, I don’t know, I mean as it, it, it I’m at specific, I’ll ask the, I’ll answer the general question. But the specific, an example is that Groupon is one of our largest advertisers. Right, so we clearly benefit from a successful Groupon. I don’t think Facebook is an advertiser, but they might be.

And I don’t think Twitter is, but I was thinking about the panel this morning, right? Groupon is an example of somebody who uses quite effectively to get started and then they bring people using adds into their system. And then they obviously make a lot of money.

When you say largest like, where would they rank?

I don’t know, but it’s a significant growth rate. Especially in, I mean obviously in, especially in the local market.

Yeah.

And their, and their particular clever at local targeting which I think why they’ve been so successful. I think in the general, on the general question of bubble, it’s, first place you don’t if it’s a bubble, you don’t know it’s a bubble until the bubble ends by definition.A nd the rule I set for myself ten years ago was that if, if the press called it a bubble, I would pay attention let me report the New York Times, Wall Street Journal and The Economist have all written articles saying it’s a bubble.

Right.

And I apologize if I excluded your other and other publications. So, so you have a couple choices, one is that, one is that the web and growth [xx] on these platforms is so large. Which is, and this is certainly possible, that you could get the kind of revenue acceleration that justifies the evaluations.

As choice A, choice B you have a liquidity squeeze where you don’t have enough shares and they’re artificially high.

Right.

And, and the answer, to answer the Google question. Google went public at a very different time. At the time, when we went public, everyone said that it would an, an unbelievably high evaluation.

Right.

And let me point out that we’ve never traded below our opening price.

Sorry, if I could force that it sounds like you’re unconvinced that [xx]

I’m not going to answer, I’m not going to give you a yes or no I don’t think, I don’t think it’s fair.

What does it matter, it implies that people get irrationally [xx]

Well I think there is one thing we can say, which is that real estate values will be going up.

[xx]. let’s talk about it, let’s be honest. What are the consequences of this?

Well, young people who need houses will go into areas of scarce housing resources and there will be competition for houses. And house will go up.

So for them it’s not a bubble, it’s actually a house. Alright, and if you’re an existing house seller who gets to sell at a higher price, you love it. So I think that’s gonna be interesting.

The other comment I would make having gone through a highly, highly publicized IPO is that you don’t really know the answer to these questions until there’s reasonable amount of circulation of shares, you have, you, you have a more stable shareholder base. You won’t have it until the initial significant lockups expire, which is typically 6 months.

So you won’t really know the answers to these questions until 2012.

Why isn’t it fair to just give a yes or no answer, I just didn’t understand that.

I don’t think it’s, I don’t think it’s my job to call the market. It’s a mistake for me to say what the market should Okay, a lot of people would say you’re really well positioned just because of your experience.

Well, but I’m not a brilliant investor. If I were a brilliant investor then maybe I’d have some status. I’m a computer scientist.

Okay.

Evaluation that would be in place for the company do you think they?

But, do you understand that evaluations, it’s, it’s mathematically incorrect. You, you, the way evaluations work, is you take one percent of the shares which are trading in secondary markets. And then you’ll imply that if 99% of their shares were in circulation that would be the value, but it’s not, right.

It’s just mathematically incorrect thinking that this is how our systems work. This bothered me at Google by the way. It’s not a new fact. So what’s, you won’t really know until there’s enough shares in trading to say what the total asset value is. The theory is that X Company is worth Y I, if you were to fully, fully you know, dissolve.

Why the values?

But it, but it’s not necessarily right. You’re taking a one percent and scaling it. I can assure you that all the shareholders of all these companies decided to sell on day one eventually the place would fall. You know, that’s why they have lockups and have restrictions for that reason. And plus all the rules went out.

But I think it’s exciting. It’s exciting for them. I wish them very well. It was fun when we went through.

Earlier this week, Google Executive Chairman Eric Schmidt gave an over 70 minute long talk to press at the Sun Valley conference here in Idaho. Towards the end of the talk, a reporter asked the former Google CEO whether he, like many in the media world, thinks we are presently in a tech bubble and what Google’s $1.67 billion 2004 IPO at a $23 billion valuation (Google’s current valuation is 171.43 billion) means in light of today’s IPO valuations.

“Oh we were underpriced,” Schmidt joked, before remarking that he didn’t actually know whether or not we are presently in a bubble.

“On the general question of bubble, in the first place you don’t know it’s a bubble until the bubble ends, by definition. The rule I set for myself 10 years ago was that if the press calls it a bubble then I’d pay attention, and let me report that the New York Times, the Wall Street Journal and the Economist have all written articles saying that it’s a bubble.

So you have a couple choices A) The revenue growth possibility on these platforms is so large that you could get the kind of revenue acceleration that justifies the valuations. B) You have a liquidity squeeze where you don’t have enough shares, and they’re artificially high.”

When a journalist pointed out that it sounded like Schmidt was “unconvinced either way,” he said that it’s difficult to know whether the valuations are fair until a significant amount of shares hit the market, usually when employee lockups expire, typically after six months, “You won’t really know the answers until 2012,” he said.

The only clear thing at the moment, Schmidt said, was that real estate values will go up. “Young people who need houses will go into areas of scarce housing resources and there will be competition for houses and housing prices will go up. So for them it’s not a bubble it’s actually a house.”

On what effect if any the seven years of market experience have had on his perspective on Google’s IPO, Schmidt said, “Google went public at a very different time, at what people thought was an unbelievably high valuation, and let me point out that we’ve never traded below our opening price.”

When pressed again by a reporter for a yes or no answer, Schmidt gave the following humble reply, ” I don’t think it’s my job to call the market. It’s a mistake for me to say what the market should think … I’m not a brilliant investor. If I were a brilliant investor then maybe I’d have some status. I’m a computer scientist.” … A computer scientist with a $7 billion net worth.


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