The coming tech crash

[Guest 50centdollars]

We are due for a correction in the tech sector and I believe it will crash soon. I am well aware of how hard it is to predict these crashes, but I think we are due for one. LNKD, TWTR, NFLX, AMZN, & FB all trade at insane valuations and most barely make any money to justify their market caps. If LNKD & TWTR can't find a way by now to make money, I doubt they ever will. All of these companies are shorts in my opinion. If you are buying these companies at today's prices, you are gambling.

 

The first "dot com" collapse occurred about 1.5 decades ago, when things like Pets.com went bust and in a big way. We all thought that these "websites" were a big deal, but it turned out, no one was making any money at them, and the stocks were highly over-valued.

 

Fast forward another decade, and now online companies are the "next big thing!" with Social Media leading the way.  We are a Facebook and Twitter generation we are told, but oddly enough, most of these new era companies are either losing money, not making much money, or not making enough to justify their sky-high stock prices.

 

AMZN has a stock price of $527 and is losing money every year, about $1 (P/E =N/A) And this is one of the more successful online companies out there. In order to justify this stock price, Amazon would have to from losing $1 to making $25/share. Not gonna happen anytime soon. And why is this company only valued based on revenues? Shareholders don't care how much profit the company make? Sure makes no sense to me. Now, I think AMZN is a good company but its stock price is insanely overpriced.

 

Next lets take the facebook for professional adults' LNKD. Again, losing about $0.38/share and the stock last traded for $190. (P/E:N/A) For them to justify their current market cap, they will need to earn about $8-10 in the future. If LNKD by now can't find a way to make money, I doubt they ever will. Also, I think their user base will start to fall off and their site will become irrelevant. It's facebook for professionals, thats all it is.

 

Next, FB, the only one that actually makes money. The stock is presently about $93 a share, and with profits of approx. $1/share, P/E ratio of 93. This is the cream of the crop for social media stocks but shareholders won't make any money going forward as FB doesn't pay any dividends. Again in order for them to justify their mkt cap, they will need to increase profits 4-5 times and the more they try to increase profits, the more users they lose. FB is a fad in my opinion. Hardcore users will stay on it but the average person will get bored and move on. I shut my account 3 years ago and would never go back on.

 

TWTR - stock price $30, losing about $1/share. Would need to make about $1.50/share to justify mkt cap. This falls into the LNKD camp. If they can't find a way to make money now, I doubt they will. Ads on twitter make it uncool. They just had a CEO change because they are not increasing users fast enough. How many people actually use twitter and I'm not talking about all the millions of accounts that are opened but never used? Whatever Twitter says is their user count, cut the number in half. Twitter is great for society but bad for shareholders.

 

NFLX - stock price $123, EPS 0.44, P/E 276. To justify their market cap they will need to make about $12/share. Market conditions could really bring down NFLX as studios and content creators come out with their own websites. Cable TV will be dead in a decade and you can now start streaming movies on youtube for a couple of dollars. Further, why get netflix when you can pay a one time fee of $90 for mygica like I did and you can stream any movie or tv show for free. I even found a way to stream live tv. Anyway, like in most industries, first to market is often last in the marketplace

 

AAPL - Stock price $113, P/E 13 Now, I don't think Apple is overpriced but what would happen to Apple if they could no longer get these wild prices for what is quickly becoming a commodity item?  Will consumers continue to pay 2x to 3x for a smart phone, just to have the Apple logo on it? Bad things could happen, and very quickly, if the cache of the Apple logo wore off anytime soon. Apple likes to increase the size or add some new gimmick to their phone and everyone goes mental for it. This is the Apple customer in a nutshell:

 

And what product would Apple introduce to re-ignite the fire?  Apple Watch doesn't appear to selling very good or else the company would have announced sales last quarter not hide them.

Samsung has already come out with three smart phone watches, and people have responded by, well, yawning. While a nice toy, they are very expensive and have limited functions as the screens are so small and there is little room inside for hardware. 

 

Why would people buy Samsung phones and not watches but would BUY iphones AND  apple watches?

http://www.idc.com/prodserv/smartphone-os-market-share.jsp

 

Apple Pay is a neat idea, but the retail industry abhors a monopoly, and already the largest retailers in the country has taken a pass on the idea of handing over huge sums of money to Apple.  What the retailers want is something cheaper than Visa and Mastercard, not more expensive.

 

And since Apple only has a minority share of the overall market, places like Wal-Mart can afford to say "no" to Apple pay.

 

In other words, despite this good news for Apple, the company is still highly leveraged as a one-trick pony, like most tech companies.  So long as they can keep selling overpriced phones to an already saturated smart phone market, they can keep succeeding.  But as conquest sales become harder and harder to come by, this may be a difficult chore.

 

With a P/E ratio of 13.34 it is not an overpriced stock - based on current earnings.  But again, we have to hope this one product continues to sell, and continues to sell at a price far higher than the competition, in a market saturated with smart phones.

 

Of course, Apple will stick around, but I don't see a lot of headroom here for the stock to go up much further.  Flashy headlines about "record profits" are fine and all, but they don't address the underlying weaknesses in the company.  Record sales today are fine - does that mean there will be record sales tomorrow?  Or does everyone who has one, already have one.

 

That and I doubt Samsung and the rest of the Android market will sit idly by in the meantime.  The cell phone business is murder in terms of competition.  Ask Nokia, Motorola, Ericsson, and Blackberry.  They'll tell you all about it - and each at one time was at the top of the heap.

 

But I think long-term, in the electronics business, devices start out hot and end up as commodity items.  Televisions, stereos computers, telephones, laptops, video games - you name it.  They were all once "hot" products in the market, and then they come down radically in price as they become more like commodity items.  We've seen this in every other electronic device, and there is no reason cell phones should be any exception to the rule.  Eventually the market becomes saturated with the devices, and then you can compete only on price, for the replacement market.

 

Long-term, this does not bode well for Apple.

 

Anyway, a tech crash is coming!

 

[ZenaidaMacroura]

 

Next, FB, the only one that actually makes money. The stock is presently about $85 a share, and with profits of approx. $1/share, P/E ratio of 85. This is the cream of the crop for social media stocks but shareholders won't make any money going forward as FB doesn't pay any dividends. Again in order for them to justify their mkt cap, they will need to increase profits 4-5 times and the more they try to increase profits, the more users they lose. FB is a fad in my opinion. Hardcore users will stay on it but the average person will get bored and move on. I shut my account 3 years ago and would never go back on.

 

 

I've read in the AMZN thread that if amazon tries to take a bigger share of profits they lose customers -I can follow that reasoning although I don't necessarily agree.  But I don't think this is true for facebook.  The appearance of ads doesn't materially impact the user experience and people tend to leave because they think they are spending too much time on it (and invariably, atleast in the case of my network/circle of friends they always come back). 

 

This is probably one of the strongest network effect companies around.  I think the fact that people have to deactivate or shutdown their account just to breakaway speaks to the stickiness.  I never shut down my yahoo email (haven't logged into it in nearly a decade?)  And my myspace account is presumably still floating around in the ether... 

 

Anyhow I'm usually behind the curve as far as social networks/new techie stuff is concerned so take this with a grain of salt.

[berkshire101]

I guess when you say bubble/tech crash, I'm thinking that all these companies like FB, AMZN, NFLX, AAPL, etc. will simply disappear and everyone will stop using their products again.  In reality, the customer base for these companies are ever growing.  Think how much value they added to our lives.  They made the world a better place.  And I think that's something really hard to bet against.

 

And the management behind these companies are extremely smart.  Fundamentally the companies themselves are solid, as in they're taking market share and managing to stay a float somehow even with operating losses. 

 

So are you saying that you know something that these guys don't know?  Are you saying that there's a bubble solely based on valuation?

[randomep]

I guess when you say bubble/tech crash, I'm thinking that all these companies like FB, AMZN, NFLX, AAPL, etc. will simply disappear and everyone will stop using their products again.  In reality, the customer base for these companies are ever growing.  Think how much value they added to our lives.  They made the world a better place.  And I think that's something really hard to bet against.

 

And the management behind these companies are extremely smart.  Fundamentally the companies themselves are solid, as in they're taking market share and managing to stay a float somehow even with operating losses. 

 

So are you saying that you know something that these guys don't know?  Are you saying that there's a bubble solely based on valuation?

 

What he is saying is that collectively those who invest in these companies will lose their shirts. No one is arguing that these companies are useful and have a profound impact on society.  But unless the investors like giving their money away to charity, these companies are failing the shareholders.

 

Back in the dot-com days, e commerce companies were selling $100 worth of goods for $75. Ok so ya the customers loved them, but they screwed the shareholders.

 

 

[Guest 50centdollars]

 

 

What he is saying is that collectively those who invest in these companies will lose their shirts. No one is arguing that these companies are useful and have a profound impact on society.  But unless the investors like giving their money away to charity, these companies are failing the shareholders.

 

Back in the dot-com days, e commerce companies were selling $100 worth of goods for $75. Ok so ya the customers loved them, but they screwed the shareholders.

 

 

 

+1 agreed

 

I don't think that these companies out bad for society at all. I use amzn all the time and it's saved me lots of money but it falls into the category of being good for society but bad for shareholders. Company is good but the stock is massively overpriced.

 

The only company that I think is useless is linkedin. I don't see the point of it. The only thing that I believe it is good for is you may find someone on there very quickly who perhaps you lost touch with over the years. That's the only thing I've used it for.  When I had lnkd, I would always get people looking to add me who I didn't even know so I didn't see the point to having it anymore. I never found a job on there anyway. It's a fad. It may survive, but stock price is insanely overpriced. When will they make money on this and how much longer is the market going to wait for them to do so???? I don't think they do so it's a short in my opinion.

[petec]

I agree with the overall thrust of the original post (although not that the crash will necessarily be imminent - such things are in the lap of the Gods!).

 

I especially agree about Apple's vulnerability.

 

Where I'm not so sure is the social media stocks.  Facebook is an irreplaceable part of the life of just about all of my friends, advertising doesn't spoil the user experience, and earnings are forecast to double next year.  That's only got to happen twice for the valuation to be reasonable!  LinkedIn I don't know at all from a financial and valuation perspective but if I was looking for a job that's where I'd start.

 

Uber (unlisted) is another: lossmaking today and therefore "PE - N/A", but quite possibly an exceptional business over time.

 

And let's face it: MSFT, GOOG, AAPL, and peers were probably all "PE - N/A" at some point, as were half the successful companies in the world.

 

My feeling is that many of these high fliers are overvalued, but some won't be - and there may be a great opportunity in a crash as the winners get sold off with the losers.

[rpadebet]

I am probably a minority here....

 

I don't think we will have a 2001 style tech crash at these valuations.

I don't think all the companies mentioned are insanely valued - maybe some like TWTR and LKDN now, but I haven't researched them enough to have an informed opinion.

AMZN,FB,NFLX are most likely bargains at these prices.

 

I subscribe to the philosophy that price is what you pay now and value is what you get in future

As others have pointed out PE multiples don't necessarily tell the whole story when companies are in reinvestment mode and typically multiples look awfully high in this phase.

 

While evaluating these and any company, the questions you need to ask yourselves is

1) whether the next dollar of reinvestment into the business is going to provide you above average returns

2) Do they have sufficiently long runway, given the market size, competition,technological change etc to keep making these reinvestment's for long enough time to allow for decent above average returns even after assuming return drag due to multiple compression to "reasonable" levels.

 

I believe that most of the value you get out of any investment is from the future earnings growth from that business. Typically their past can inform/influence but not predict how the future will look like.

 

I believe if you buy it at cheap PE multiples you will tend to do better than the business on average. And if you buy at high PE multiples you will do worse than the business does, assuming PE normalization in both cases. The critical factor here is all businesses don't do the same in the future, some have outstanding returns on their reinvestment, some average and some worse.

 

This is why I spend my time analyzing the business prospects rather than worrying too much about the current price and multiple. I invest if I think I can meet my return hurdle assuming multiple compression/expansion to the average as the case maybe AND only if the candidate business prospects meet the criteria I have listed above.

 

I agree that this analysis is not as simple as buying something at discount to TBV or NAV and hoping for the gap to close. But even this form of investing is not as easy as it seems on the surface most of the time. The discounts are most likely warranted and they go away only if future business prospects are better than what the market currently anticipates.

[Guest longinvestor]

History does repeat itself, especially the hype. There was a thread, I think in 2013 here that asked folks to list their top 10 short ideas. Mine had all of these tech companies listed by the OP. Of course mine ended at the bottom of the heap at the end of the year. If shorting over 5+ years is allowed, my picks would perhaps end up higher on that list. My picks were no more intelligent than "making money matters", ha.

[Palantir]

I think FB is a pretty reasonable multiple. AMZN, if you are looking at net income then you need to keep reading.

[frommi]

I don`t think a tech crash is coming, but a biotech crash. You can pick a random company out of XBI and be sure to hit something like RCPT. 7 billion marketcap, 5-10 million in revenue, insider dilution, heavy losses. (but i am sure they have a wonderdrug in the pipeline ...)

The problem is that in XBI are 100 companies that are similar to that. I don`t need to be a biotech specialist to see that the real bubble in us equities is there.

[rpadebet]

I don`t think a tech crash is coming, but a biotech crash. You can pick a random company out of XBI and be sure to hit something like RCPT. 7 billion marketcap, 5-10 million in revenue, insider dilution, heavy losses. (but i am sure they have a wonderdrug in the pipeline ...)

The problem is that in XBI are 100 companies that are similar to that. I don`t need to be a biotech specialist to see that the real bubble in us equities is there.

 

This is something I agree with somewhat...

Not all drugs in pipeline are going to be wonder drugs...but how can we be sure and exclude the ones which are going to be? If the thesis is to short a basket...

 

Also like in venture capital investments, does one blockbuster drug make up for the losses for the rest and still provide an adequate return on capital? It could be a bubble if that threshold is passed....how could I be reasonably certain about that without knowing how many blockbusters, how big of a blockbuster and how quickly it will be a blockbuster.

[frommi]

I don`t think a tech crash is coming, but a biotech crash. You can pick a random company out of XBI and be sure to hit something like RCPT. 7 billion marketcap, 5-10 million in revenue, insider dilution, heavy losses. (but i am sure they have a wonderdrug in the pipeline ...)

The problem is that in XBI are 100 companies that are similar to that. I don`t need to be a biotech specialist to see that the real bubble in us equities is there.

 

This is something I agree with somewhat...

Not all drugs in pipeline are going to be wonder drugs...but how can we be sure and exclude the ones which are going to be? If the thesis is to short a basket...

 

Also like in venture capital investments, does one blockbuster drug make up for the losses for the rest and still provide an adequate return on capital? It could be a bubble if that threshold is passed....how could I be reasonably certain about that without knowing how many blockbusters, how big of a blockbuster and how quickly it will be a blockbuster.

 

My theory is that up to this point most of the biotech companies that really have something in store are already bought. And yes its a basket bet of just going short XBI.

[mcliu]

I think the tech bubble is more evident in cloud based tech companies and software-as-a-service businesses, especially in late-stage venture and some publicly-traded firms. For example, take a look at Workday, NetSuite, ServiceNow. Investors seem to be assuming that subscription-based services have no churn, low CAC and limited competiton. The financials of those companies seem to tell a different story.

[bizaro86]

I don't necessarily disagree with your idea, but I'm curious why you think the fair value P/E for Netflix is 10, when you used 20 for Amazon and FB?

[Cardboard]

I think that the lesson from 1999-2000 is that you need to look for the smaller, less used or useful companies to disappear and not the top dogs.

 

I thought back then that Amazon, Yahoo and EBay where all overvalued but, would still exist in the future. The bubble finally popped and they all went down but, these ones did go back up unlike a myriad of others who disappeared with their bad business model.

 

So I would not bet against Netflix, Facebook, Twitter or LinkedIn. They may go down a lot in a crash but, are likely to pop back up eventually with their earnings growth or by being acquired. On the other hand, it would be nice to find a list of not so well known wannabe's. That is where the 90% + losses will be.

 

Biotech is also an interesting short. I remember that you could not give away Pfizer or Merck about a decade ago. The fear was that their pipelines were running empty and that they would face generic competition on all their most profitable drugs due to patent expiration. How that has changed!!!

 

Cardboard

[rkbabang]

 

I don't think that these companies out bad for society at all. I use amzn all the time and it's saved me lots of money but it falls into the category of being good for society but bad for shareholders. Company is good but the stock is massively overpriced.

 

The only company that I think is useless is linkedin. I don't see the point of it. The only thing that I believe it is good for is you may find someone on there very quickly who perhaps you lost touch with over the years. That's the only thing I've used it for.  When I had lnkd, I would always get people looking to add me who I didn't even know so I didn't see the point to having it anymore. I never found a job on there anyway. It's a fad. It may survive, but stock price is insanely overpriced. When will they make money on this and how much longer is the market going to wait for them to do so???? I don't think they do so it's a short in my opinion.

 

Just an anecdote, my company spent 2 years and a couple of different agencies searching for someone to fill a certain position, they eventually found me through my linkedIn profile, contacted me, and made me an offer I couldn't refuse (and my former employer couldn't match).  So I owe my current job to linkedIn.

 

[Guest Grey512]

 

I don't think that these companies out bad for society at all. I use amzn all the time and it's saved me lots of money but it falls into the category of being good for society but bad for shareholders. Company is good but the stock is massively overpriced.

 

The only company that I think is useless is linkedin. I don't see the point of it. The only thing that I believe it is good for is you may find someone on there very quickly who perhaps you lost touch with over the years. That's the only thing I've used it for.  When I had lnkd, I would always get people looking to add me who I didn't even know so I didn't see the point to having it anymore. I never found a job on there anyway. It's a fad. It may survive, but stock price is insanely overpriced. When will they make money on this and how much longer is the market going to wait for them to do so???? I don't think they do so it's a short in my opinion.

 

Just an antidote, my company spent 2 years and a couple of different agencies searching for someone to fill a certain position, they eventually found me through my linkedIn profile, contacted me, and made me an offer I couldn't refuse (and my former employer couldn't match).  So I owe my current job to linkedIn.

 

Same here.

[jschembs]

I agree with the overall thrust of the original post (although not that the crash will necessarily be imminent - such things are in the lap of the Gods!).

 

I especially agree about Apple's vulnerability.

 

Where I'm not so sure is the social media stocks.  Facebook is an irreplaceable part of the life of just about all of my friends, advertising doesn't spoil the user experience, and earnings are forecast to double next year.  That's only got to happen twice for the valuation to be reasonable!  LinkedIn I don't know at all from a financial and valuation perspective but if I was looking for a job that's where I'd start.

 

Uber (unlisted) is another: lossmaking today and therefore "PE - N/A", but quite possibly an exceptional business over time.

 

And let's face it: MSFT, GOOG, AAPL, and peers were probably all "PE - N/A" at some point, as were half the successful companies in the world.

 

My feeling is that many of these high fliers are overvalued, but some won't be - and there may be a great opportunity in a crash as the winners get sold off with the losers.

 

MSFT and GOOG were never PE NA as public companies, and certainly not at this stage in their growth cycles.

[LongHaul]

I totally agree with you 50cent.  People have gone absolutely nuts on a lot of stuff.  They seem to have forgotten

that 2+2 still equals 4.  I used to get frustrated by these bubbles as they make no sense whatsoever but they keep happening over and over and over.  The last 200 years is a history to booms and busts in all types of asset classes.  There are always plausible sounding stories why it is different now but the truth is it really isn't and prices come down to true value eventually.  At this point I just laugh and think it is ridiculous. 

 

The tech bubble we are in is especially funny because this just happened back in 2000.  Check out Jet.com - they are trying to beat Amazon on price!  I guess they will make up their loss on each unit with volume. 

 

It is not just a tech bubble right now - but also a real estate bubble in many countries, China, Emerging market, etc.  Bond Bubble, High yield bubble, commerical real estate bubble in many places, Emerging markets credit bubble and who knows where else.  It is a classic credit cycle boom that will end in an especially nasty bust.  It is time to be prudent and stay conservative and get ready for a major bust.  The timing is uncertain though.

[randomep]

 

I don't think that these companies out bad for society at all. I use amzn all the time and it's saved me lots of money but it falls into the category of being good for society but bad for shareholders. Company is good but the stock is massively overpriced.

 

The only company that I think is useless is linkedin. I don't see the point of it. The only thing that I believe it is good for is you may find someone on there very quickly who perhaps you lost touch with over the years. That's the only thing I've used it for.  When I had lnkd, I would always get people looking to add me who I didn't even know so I didn't see the point to having it anymore. I never found a job on there anyway. It's a fad. It may survive, but stock price is insanely overpriced. When will they make money on this and how much longer is the market going to wait for them to do so???? I don't think they do so it's a short in my opinion.

 

Just an antidote, my company spent 2 years and a couple of different agencies searching for someone to fill a certain position, they eventually found me through my linkedIn profile, contacted me, and made me an offer I couldn't refuse (and my former employer couldn't match).  So I owe my current job to linkedIn.

 

Same here.

 

I post my resume on monster.com whenever I start looking. And it alerts recruiters immediately. I have used it to land jobs 1/2 a dozen times. So, that's my medium, so can I argue that monster should have the same valuation as linkedin?

 

 

[mcliu]

Unicorns everywhere:  ::)

 

http://www.ritholtz.com/blog/wp-content/uploads/2015/10/unicorn.png

[Palantir]

So....when is this crash happening? Am I invited?

[rkbabang]

So....when is this crash happening? Am I invited?

 

Still TBA, but everyone's invited.

[greenbriar]

Here's a counterpoint from Sam Altman of YCombinator:

 

http://blog.samaltman.com/the-tech-bust-of-2015

 

He thinks most of the bubble is limited to late stage private valuations and that even those "valuations" are being misunderstood.  The late-stage unicorns raise primarily through debt instruments with high liquidation preferences; the top line valuation in those is actually more of an option.