Tech Bubble? What Tech Bubble?

HughPickens.com writes: Conor Dougherty writes in the NYT that the tech industry's venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them: Bubble. "I guess it is a scary word because in some sense no one wants it to stop," says Tomasz Tunguz. "And so if you utter it, do you pop it?" In 2000, tech stocks crashed, venture capital dried up and many young companies were vaporized. Today, people see shades of 2000 in the enormous valuations assigned to private companies like Uber, with a valuation of $41 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round. A few years ago private companies worth more than $1 billion were rare enough that venture capitalists called them "unicorns." Today, there are 107 unicorns and while nobody doubts that many of tech's unicorns are indeed real businesses, valuations are inflating, leading some people to worry that investment decisions are being guided by something venture capitalists call FOMO — the fear of missing out.

With interest rates at historic lows, excess capital causes investment bubbles. The result is too much money chasing too few great deals. Unfortunately, overcapitalizing startups with easy money results in superfluous spending and dangerously high burn rates and investors are happy to admit that this torrid pace of investment has started to worry them. "Do I think companies are overvalued as a whole? No," says Sam Altman, president of Y Combinator. "Do I think too much money can kill good companies? Yes. And that is an important difference."

Comments

Who cares if it kills companies?

[msobkow]

What ticks me off is not that bubbles kill companies, but that bubbles kill retirement plans because of all the greedy "analysts" betting on a "sure thing."

Re:Who cares if it kills companies?

[ranton]

Too bad that doesn't stop a common mistake, though - someone betting everything on the company they work for, salary, stock/options, and 401(k) investments.

There is no level of diversification or foresight that can protect the masses from major bubble collapses. Sure some people will get lucky, and they will spend the next 20 years pretending it was their expert planning that explains this luck, but the vast majority will have their investments take a significant hit. You can put your money in index funds to avoid excessive fees, but have the stock market tank. You can put your money into buying rental properties, only to have your local real estate market tank. You can put your money into bonds, only to have their value erode as interest rates and inflation rise. You can put your money into precious metals only to have that bubble burst too.

Most people don't have enough money to diversify any better than just putting their money in diversified mutual funds. But then they lose almost all of the control you seem to expect them to have over their investments.

Re:Who cares if it kills companies?

[lgw]

There is no level of diversification or foresight that can protect the masses from major bubble collapses.

Sure there is. It's so easy, you probably can't see it. Just stay away from individual companies, even individual industries, invest broadly across the market as a whole and ignore collapses - just ride them out. If you invest in some SP500 or "all stocks" fund, or whatever, you've own the same micro-% of the American economy before, during, and after the crash, and through the recovery. The exchange rate between USD and "micro-% of all sticks" may fluctuate wildly for a while, but just don't sell in a panic and you'll be fine in a few years.

The closer you get to retirement, to more you'll need some share of your investments in quality bonds, so that if you need money to live on through a crash bottom you won't need to sell stock. (Government bonds are not quality bonds any more - after the US government punished ratings agencies who dared question the rating of US debt, you can never again trust any sovereign debt rating in the US - just steer clear of the category.) The old-school rule of thumb was "your age as a % in bonds", but that's from a time when interest rates were quite high. Less than half your age as a % in bonds is probably a mistake, however - you need something to be selling that's not stocks when everyone is screaming about the end of the financial world in every decade's crash.

Don't over-think the problem, don't act out of emotion, just accumulate wealth and have patience. In times when everyone seems emotional about the market, make damn sure you're not being emotional before you take any action. I've sailed through the dot-com crash, the 08 finance crash, and I'm fully expected the next one will be along soon enough, but you just keep accumulating "micro-% of all stocks" regardless and, sure enough, you become more wealthy over time.

If it happens...

[alphatel]

It's a good thing for the economy to clean out the trash. There's no such thing as a market that never collapses. If we had that we could call it by its true name: fantasy.

Re:If it happens...

[theguyfromsaturn]

Unfortunately, most economists subscribe to fallacy of infinite growth. If limiting factors were understood, then a stable economy at its capacity (and healthy) would be more clearly differentiated from a stagnating economy (stable, but below capacity), and you would not have to suffer these collapses. Collapses are a sign of an unhealthy ecosystem, and the same is true of the economy. Until the economy is treated as a subcomponent of the ecosystems it depends on, unfortunately, this is not likely to stop.

Uber not worth $41 billion ...

[gstoddart]

There is no way Uber is worth $41 billion.

That's a ridiculous number trumped up by idiots in the stock market who have overvalued a tech company.

Unicorns indeed. Uber is a tech company with an app, they sure as hell don't have that as a sensible valuation based on revenues or assets.

So every company Uber is going to buy with a stock swap? The stock owners should sell off and run, because they're being bought with funny money -- like when AOL bought Time Warner.

Increasingly I think the stock market is full of drooling idiots who think they're playing the lottery -- because that's the only sensible explanation for these ridiculous valuations. And, yes, this is exactly like the .com era -- a complete lack of common sense about the valuation of things because people desperately want them to be huge.

Of course, the problem is by the time the bubble bursts it's only the little guys who were hoping to pick up some scraps still holding onto the stock, because all the wealthy people and institutions have gotten out and run because they know damned well it's overvalued.

Then it's just finding suckers to take the overvalued stock off your hands.

Re:Uber not worth $41 billion ...

[Mashiki]

There is no way Uber is worth $41 billion.

That's a ridiculous number trumped up by idiots in the stock market who have overvalued a tech company.

Of course it isn't. Shit like the article in question is to dupe people with money to spare while the people who are knowledgeable are already pulling their money out. There was exactly the same type of shit-tier articles going on pre-dotcom crash. All you need to do is look at the investors, and you see many shifting their assets to things that aren't nearly as volatile.

Re: Uber not worth $41 billion ...

[mattwarden]

Um, no, you are exactly wrong. Uber is valued at $41b because of public stock market traders. The private investors are willing to pay $x, where $x is less than the valuation after IPO minus the time cost of money. This is all driven by idiots investing in the public stock market. They are the engine car that pulls the train.

Re: Uber not worth $41 billion ...

[bouldin]

Agreed; IPO is the exit strategy for these private investors. It's how they cash out.

I feel like I should point out that facebook's price/earnings ratio is 80, which seems insane since their business model has matured and it's not clear how in the world they can squeeze out 4x the profits. In fact, it seems more like they are a house of cards that could easily fall over given a market disruption.

But, that's the IPO these investors have in mind when they're guiding the next facebook to a public offering.

I suspect zuckerberg knows his company is overvalued, and that's why he is willing to pay billions for companies that have no revenue model. He knows FB stock is "funny money."

Re:Uber not worth $41 billion ...

[CastrTroy]

I can see how Uber is worth a lot of money. Maybe not $41 billion, but definitely a lot of money. It's called "mind share" and "reputation". I know a lot of people don't think those are important, but I think they are very important. Look at Coca Cola. They don't make anything that anybody else can't make. Some people think they are the "best" cola, but that 's only because it's what they're used to drinking. If they were raised on Pepsi or RC Cola, they would think that those are the best.

Uber has made a name for itself as the alternative to the Taxi Monopoly. And the Taxi business is a huge market, especially if you look at it world wide. Sure, it wouldn't be difficult for somebody else to copy their functionality. But they have built up the reputation. And that make it quite difficult for somebody to get ahead of them at this point in the game. Every alternative Taxi company will be known as Uber wanna be's, just like there are a ton of people who have no idea there's any tablets other than an iPad.

Tech Replace Mines

[rtb61]

Basically all that has happened is tech companies have replaced mining companies in pump and dump schemes because of course tech companies require much smaller capital investment.

So tech just like mines, the initial investors working in collusion with their financiers who get a cut, work to create an illusion of a massive pot of gold at the end of a deep capital hole in the ground, which they sell to others and often pension funds are the targets.

So why do investment analysts for pension funds make so many bad investments, quite simply they are paid to do so with the money deposited in off shore tax havens. So paying a hundred million in bribes works when you are selling a billion dollar cough cough investment when you only invested a couple of hundred million in it. To put the cheery on top for themselves, they also run up huge debts paying themselves grossly inflated salaries.

It is not the front people doing it, it is the financiers doing it all in the background lending them the money to do it, advising them how to do it, cashing in on it being done and the culprits earning the sales commission selling the rubbish investments whilst they pay purchasing commissions to corrupt pension fund managers.

Crack open those tax havens and wow, will a whole bunch of the rich and greedy end up in jail, as well as corrupt politicians. The pressure is mounting for justice and it will come.

Re: Tech Replace Mines

[Required Snark]

Stock Buybacks are driving stock prices.

One big source of demand for stocks in recent years has come from companies buying back their own shares. These buybacks have not just provided extra demand — they have decreased the total supply of shares available. So the buybacks have shifted the supply-demand balance and helped drive stock prices higher.

All these buybacks, which have ranged between $75 billion and $159 billion a quarter for the past four years, have provided a steady flow of demand for shares. As the chart below shows, the buybacks have not been offset by new share issuance, so they have modestly reduced the total supply of shares available for S&P 500 companies. The number of shares outstanding is now lower than it was back in 2005, almost 10 years ago.

This is a direct effect of low interest rates. Companies are taking out loans for the buybacks

Another big source of cash for buybacks, however, has been debt. As the chart below shows, companies have been borrowing like mad in recent years. And they have been using lots of the cash they borrow to buy back their stock.

Why are they doing this? Because high stock prices disproportionally favor the top level executives. The get stock at a discount (stock options) and can game the tax code for lower taxes as well. It's a legal way to loot their companies.

Why are rates so low? Because the previous generation of corporate criminals wrecked the world economy with their greed. Low interest is the way that governments are trying to regrow their economies.

Now governments all over are giving free money to the same group of people (and even the same individuals) who caused the damage in the first place with these near zero interest rates. (For example, the US Federal fund rate for the big lenders is 0.25%.)

Stock buybacks don't grow the economy. There is a direct relationship between the sky high stock market and the long delayed general recovery outside the stock market.

This effectively redistributes wealth upward. The rich get richer at the expense of everyone else.

It's also another bubble. Whenever rates do go up there will be another crash. And given recent history, it will end up turning into another way of stealing from the poor to give to the rich.

Re: Remember Groupon?

[mattwarden]

That is not very correct. Investors know what the company is doing on the accounting side, in all but very rare fraud cases. Companies like you're talking about are pretty clear on what drives their Non-GAAP measures and they make an effort to explain why the non-GAAP measures are the "right" ones. It's a joke in the investor community how divergent GAAP and non-GAAP rev and earnings become over time. They know. They just invest anyway because they "know" others will too.

it depends

[MrKaos]

Consider that venture capitalists invest in the exit, not in you having a great time building a great idea into a great company with great people.

Then consider 1915-1965 had innovations like penicillin, the auto mobile, aircraft, the space race, and that 1965-2015 has had the IC and internet as really defining innovations then from that perspective the rate of innovations is on the decline.

All the new "inventions" I can think of that are available to the masses are all designed to improve something that already exists to get people to consume more efficiently. I think this is directly attributable to patent and copyright laws preventing long term economic growth that comes from innovating new things which is the longer term fall out from activities conducted by the music industry and patent trolls. IT is just the most obvious sufferer.

Until the X and Y generations (or N-generation for those born *after* the invention of the internet) start taking political power from the Baby Boomer's we are going to be stuck in 1950's thinking. And that's not to say some Baby Boomers aren't capable of 21st century thinking, it's just that there isn't enough of them to make a political difference.

I'm convinced that humanity is on the verge of some spectacular innovations, like long carbon nano-tubes, genetic and nano engineering. However all of these ideas pale in comparison to the idea that we can change something as simple as the laws that maintain the status quo.

So this cycle of bubble and burst will continue whilst the engines of innovation are suppressed. Who knows when it will burst or deflate - just be ready when it does.

Re:Last time we saw crazy market valuations,

[LostMonk]

What will it take to get reform?

Blood on the streets. Lots of it.

Interest rates

[Tony Isaac]

Interest rates have been so low that nobody wants to invest in bonds or other interest-bearing funds. Where else are people with money going to invest? Once interest rates start coming up, the picture is going to change dramatically.

It doesn't seem as bad as it was in the late 90's, when investors were throwing money at anyone who could do something "on a computer." At least this time around, most of the companies with high valuations actually do something valuable, even if they don't yet know how to make money. Still, there are a lot of crazy stock prices out there.