Tag Archives: bubble

The Myth of Ariba

(Warning: long post ahead.)

I was minding my own business, reading Past Due by Peter Goodman (I got it from Simon, who I think got it for free), and there on page 43 I ran into Eric Bochner. I thought that name sounded familiar, and then I remembered what it was. Eric Bochner was a vice president of something or other (and then the vice president of something else or other) at Ariba, where I worked from April 2000 until September 2001 (I was also a consultant there from December 1999). Chapter 2 of Goodman’s book is about the Internet bubble, Ariba is his case study, and Bochner is his source.

As far as I know, no one has made Ariba the poster child for the Internet bubble before–people usually go with WebVan, or Pets.com, or something similarly vaporous. Ariba is a more complicated story, but you can make a case that we deserve to be on the poster. At our peak we were bigger than all those pet food companies combined, with a market capitalization over $40 billion (on quarterly revenues of about $100 million at that time). More to the point, if Pets.com is comedy, Ariba is tragedy (well, not really, but you known what I mean): Ariba was a real company with a real product that got swept up in its own hype, with unfortunate consequences (but not fatal ones–Ariba today earns over $300 million in annual revenues and a small profit).

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More on Spotting Bubbles

In comments on my previous post on bubbles, John McGowan and others point out that you can use the price-to-rent ratio (or price-to-income) as an indicator of a housing bubble. I think this is a partial but not a perfect solution.

The value of a thing should be the net present value of the future cash flows from the thing. In experimental economics, they use securities with absolutely certain cash flow profiles, so when a bubble in prices appears, you have an objective measure of value to compare it to. With individual stocks, on the other hand, the P/E ratio could go up to 100, and you can back an implied growth rate of earnings out of that, but who’s to say the company won’t hit that growth rate? At that point it’s just your opinion against the market’s.

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