After the collapse of the 2000 Tech Bubble, Scott McNealy, the CEO of Sun Microsystems made this famous quote:
“[T]wo years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking!”
Zillow (Z) is now in Sun Microsystem in 2000 territory valuation-wise. It sells at about 28x sales revenue, with 0% profit margins. Undoubtedly, it’s a great company, and it will continue to grow rapidly, eventually expanding the profit margins … but at the current valuation, it’s almost impossible to imagine that any current long-term shareholders could turn a profit over the next 10 years.