January 25, 2016

Has the Bubble Burst?

steerclearsignalsIt is not uncommon to move past a “bubble” bursting and not realizing it.  Denial plays a big part in the recognition of such a phenomena.  While I admit the speculation can grow extremely strong as pundits try to claim their 15 minutes of fame by making bold statements of impending doom only to get caught up in the hype itself.  It is unfortunate that for the most part a bursting bubble is basically only recognizable in hindsight.  Until then we witness what has become known as the Wile E. coyote period. Fans of the Roadrunner cartoons should get this picture – Wile E. Coyote running off a cliff, legs still moving forward with nothing underneath them and then that look of “oh crap” as gravity takes over.

I remember the “dot-com” implosion.  While the top occurred in March of 2000 there were huge swings to the upside as traders failed to see the “writing on the wall.”  The downside though was persistent.  Scattered and appearing small at first, it then avalanched until the end of 2002.  As a resident of the San Francisco Bay Area the layoffs were also scattered and small at first but when all was said and done the slide wiped more than 250,000 jobs from the local economy.  Local residents, though, either denied it was happening or were totally oblivious to it – at least for the balance of 2000.  The local economies were flush with cash bad business plans found funding, office space was quickly leased at any price and real estate listings drew massive crowds willing to bid well over the asking price.  Office parties were all the rage often resembling a grand New Year’s Eve celebration.

wile_e_coyote_2Sound familiar?  Could the next Wile E. Coyote moment be at hand – that moment when you suddenly realize that gravity is about the takeover and hurtle you back to earth.  Let’s take a look at several reasons the tech sector should be concerned:

  1. Does the market/investor still like your app?  Outside of the markets getting slam dunked to begin 2016 tech startups found it difficult in 2015 to raise capital.  Only 23 actually made it staging initial public offerings according to Renaissance Capital.  The total net cash raised was a paltry $4.2 billion  compared to $32.3 billion raised in 2014.  Many companies expected to launch via an IPO didn’t.  Dropbox, the cloud storage firm was highly anticipated to go public but chose to hold off.  Companies that did manage did not receive a ticker tape parade.  Square, headed by Jack Dorsey in his dual role CEO of both Square and Twitter was forced to price Square’s IPO at $9, which was well below the expected range of $11 to $13.  Fitbit priced its June IPO at $20 quickly catching an updraft to reach $50 by August with gravity taking over and the stock reaching a low of $15.52 last week.  ETSY Inc. the online marketplace for all things handmade debuted above $35 in April 2015 and reached a low at $6 last week.  Newcomers were not the only companies to suffer the wrath of gravity take a look at Yahoo and Twitter both of which continue to slowly drop off into the sunset.
  2. Shrinking Valuations – While venture capitalists remain willing to dump additional cash into the constant flow of new and must have apps the latest funding rounds are cutting the value of many startups by more than 50%.  This is a clear sign that investors are no longer comfortable with high(er) valuations for many tech firms, particularly private held startups currently carrying a $1 billion-plus valuation.  Take Dropbox and Snapchat for example – both firms saw mutual funds scale back estimated of how much the firms were worth.
  3. Layoffs – while not making the headlines several tech firms are cutting staff.  Yahoo is expected to cut its staff by 10% which may include its CEO.  GoPro announced in January plans to cut 7% of its workforce.  Last year saw eBay, Groupon, Intel, Twitter and Zynga all downsize its workforce.  Then there were the companies that didn’t survive, Homejoy, Plug.dj, PachIt, Rdio and Sidecar have all closed up shop.
  4. Sublease and Party like it’s 1999 – it would appear that nobody has taken note of Twitter’s desire to sublease part of its San Francisco headquarters.  Even with the huge tax break given by the city of San Francisco, it appears that Twitter just doesn’t need all that space and with rents averaging over $72 a sq/ft, Twitter stands a good chance of making a tidy profit over when combined with the huge tax breaks granted by SF.  Holiday parties, though, were once again “over the top” for 2015.  Twitter, for example, took over AT&T Park to host its employ holiday party.  Yahoo and Facebook though took the top honors for theme parties seemingly based on the “Roaring Twenties.”  And for those wondering the 1920’s were the decadent decade the proceeded the crash of 1929 and the Great Depression.

deceptionThe signs are out there.  Whether or not they will get noticed or picked up is something yet to be seen.  The huge influx of capital seems to be still in place as millennials continue to believe it’s all just getting started and any downside is a “buying” opportunity.  So how do you better prepare yourself.  One method would be to keep a closer look at what company “insiders” are doing and where institutional money is being placed.  As earnings season begins to unfold many firms will be moving capital around as well as many insiders take profits.

Next up – I’ll take a look at the some of the high flyers and tech titans to get a gauge on what is happening.  In advance of that check out the data provided by Sage Data Service, for the latest SEC filings.

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