By JEFF REEVES at Marketwatch
This, my friends, is what a tech bubble looks like.
I won’t spend any more time on how ludicrous this buyout idea is. I already wrote a whole column last month about going after Tesla would be a gigantic waste of money that would result in a measly 1% revenue bump for the smartphone giant despite a roughly $30 billion price tag on the deal.
But it’s worth noting the Apple-Tesla talk as a sign of how feverish the Silicon Valley crowd has become. It seems there is no high-profile name not worth owning, no premium that’s too rich for a “disruptive” product, and no way investors can’t imagine themselves swimming in piles of cash after they buy in.
What a crock.
With each passing day, there are more and more signs that tech investors are in full-on, delusional greed mode, where any flashy gizmo is seen as a guaranteed path to big-time returns.
But those who don’t wise up soon may find themselves in a world of hurt.
This year’s South by Southwest conference has been full of the expected tech-loving drivel. But there also are some dark undertones for investors interested in something other than a keynote from Snoop Dogg.
Take venture capitalist Bill Gurley, who warned at SXSW that there is “a complete absence of fear” in Silicon Valley. He said the fairy tales of success will fall apart for many tech companies in 2015, and that we will “see some dead unicorns this year.”
And to make a bleak statement even darker, Gurley warned that such a crash could weigh on other sectors beyond tech, including real estate for communities like San Francisco that have relied on the tech bubble for success.
Gurley already was on my radar, having previously written on a similarly disturbing tech topic — the idea of a “risk bubble” driven in large part by initial public offerings and late-stage private placements, where companies with huge burn rates fool investors into thinking they are proven businesses simply by virtue of their scale.
He warned about how absurdly competitive these late financing stages have become despite the fact “very few of these companies are at a point where they could or should consider being public.” Still, investors are presuming a level of maturity and stability at these companies that really have little of either.
Some bulls will simply scoff and say that Gurley is wrong, that he’s just another disgruntled wannabe who has missed out on some of the sexiest start-ups of 2015.
Except he’s invested in Uber, DropBox and SnapChat, among others. So this guy actually is talking against his own book with this pessimistic outlook.
That should tell you something.
It’s true that some companies have managed to defy gravity thus far, and a few elite companies may be the real deal.
But many others — particularly recent tech IPOs — haven’t been so lucky.
Consider Box Inc. BOX, +1.29% , which I called a doomed company as soon as it filed its S-1 last year. Shares of Box are down almost 30% since its January IPO, thanks in part to deep and continued losses.
I’m not particularly proud of this call, because anyone with half a brain could have looked at the nasty numbers and seen a train wreck coming. But it’s noteworthy just because so many investors didn’t even bother to look at the balance sheet — and in fact, Box priced above its initial IPO range despite the obvious risks, then popped 66% on its first day of trading.
Right before a never-ending downward spiral, of course.
And Box isn’t alone. There are several other ugly “disruptors” out there that have failed to live up to their promise in the last year or so, including:
Fancy New Websites: Angie’s List ANGI, +2.00% is down 50% in the last year and down almost 80% from its 2013 peak, while Coupons.com COUP, +0.56% is down 65% from its first day of public trading about a year ago. Both continue to suffer from a persistent lack of profits — something that should surprise no one.
Fancy New Data Stocks: In addition to the ugly performance of Box, flash-memory company Violin Memory VMEM, -0.57% is down nearly 25% year-to-date and off 50% from its 2013 IPO.
Fancy New Cloud Stocks: Cloud-based marketing and business software has been fashionable for some time now, but some of the biggest names in the space are sucking wind. Marketo MKTO, -0.11% is down 20% year-to-date after an ugly February earnings guidance update that projected worse-than-expected losses, and is off about 40% from its early 2014 high. Netsuite N, -0.05% is “only” down 13% this year, but after it dropped about 30% in short order in the beginning of 2014, investors might want to prepare for more pain to come.
You could say that I’m cherry picking stocks here, or that I’m cherry picking returns based on time frames that suit me. To a certain extent, that’s a fair criticism.
But the fact remains that all of these stocks were setting off serious warning bells before their troubles — namely, via continued cash burn and little hope of profitability.
That simple common denominator of too much hype and too little profit seems to be the obvious culprit.
Of course, negativity for a lot of these stocks doesn’t mean everyone is feeling the pain.
Asian internet giant Alibaba BABA, +1.45% threw $200 million at Snapchat to value the company at $15 billion — all despite the messaging app not having a serious revenue plan and losing its chief operating officer right as the hard work of building an actual business has begun.
And in the public markets, red-hot tech stock FireEye Inc. FEYE, +0.83% has jumped about 60% since October thanks in part to a broader focus on cybersecurity helping to deflect attention away from its buckets of red ink and the fact it’s still trading at about half of its peak 2014 pricing right now.
These facts may embolden some investors, and probably reinforce the notion that I’m simply a disgruntled Luddite who doesn’t truly understand tech investing.
But rather than chase the latest frothy tech fad, I think a much safer play would be to look beyond untried startups and ensure the tech portfolio of your portfolio is biased toward proven names instead.
These would be enterprise tech giants like Microsoft MSFT, -0.42% and CiscoCSCO, +0.48% — companies that yield 3% in dividends and have rock-solid balance sheets. Both also boast more attractive earnings valuations than the market at large — a forward price-to-earnings ratio of 14.2 for Microsoft and 12.3 for Cisco, vs. 17.5 for the S&P 500 right now.
I believe in the promise of good technology stocks, and I also believe the sector should play a big role in your portfolio. But I believe in doing so responsibly, with a focus on stability and long-term returns instead of going all-or-nothing on overpriced Silicon Valley fads.
Yes, the current market environment gives investors no incentive to chase interest-bearing assets like bonds. And yes, most investors are struggling to find real growth opportunities.
But that’s no excuse for burying your head in the sand about the harsh reality of unprofitable tech stocks.
If people like Bill Gurley are starting to wonder whether the ride is almost over, it may behoove all investors to do the same.