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Is Tech Bubble II the Latest Investor Threat?

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Friday,September 4, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET
Is Tech Bubble II the Latest Investor Threat?
by Mike Larson

Dear ,

Mike Larson

Nineteen-ninety-nine may seem like an eternity ago to some people. But I still remember it like it was yesterday. The economy was booming, the dot-com valuations were soaring, the 500%+ IPO day gains were all around us, and the $1,000 stock price targets were grabbing headlines throughout the business press.

Then it all came crashing down, along with the Nasdaq Composite. Investors swore they had learned their lesson, and that we'd never experience a true "Tech Bubble II." But is that really the case? Or are we in the midst of the second bubble incarnation in Silicon Valley ... one that's starting to burst, becoming yet another threat to investor wealth?

I pondered that earlier this week after CNBC dedicated lots of air time to the topic and I read a fascinating Vanity Fair article. It came packed with fascinating anecdotes and facts, all of which seemed to confirm things have gotten out of control again. For instance ...

* More than 100 start ups are now valued at more than $1 billion each – despite having limited operating histories and negligible sales and earnings. They've earned the nickname "unicorns," and you can find more of them now than ever before.

CB Insights counted 47 new ones in 2014, six times more than a year earlier. Another 32 joined the club in the first half of 2015.

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* Fly-by-night companies and "me too" start ups, all trying to copy the model of already-public or other successful firms, are once again seeking hundreds of millions of dollars ... and often getting it.

* Halloween parties with multiple acrobats and 600-pound tigers as props. Interns earning $7,000 a month. Weekend trips to billionaire Richard Branson's Necker Island private resort for well-connected investors and tech execs. They're increasingly becoming the norm.

* And of course, huge new office complexes and headquarters buildings are going up all over the region. Two of the most well-known: Apple Inc.'s (AAPL) "Spaceship" in Cupertino and Salesforce.com's (CRM) 1,070-foot skyscraper, the tallest building in San Francisco.

The most famous startup of them all may have contributed to a second tech bubble.

Some backers argue that "this time it's different," because many of the most bubble-icious companies aren't public. That means founders, private investors, venture capital firms, and employees will get hurt if they go bust ... but the broad investor population won't.

But is that really true? Not from where I sit.

First, there are plenty of publicly traded, formerly "red hot" cult stocks that are already torpedoing investor wealth. I wrote about them in early August and last October. If you invested in them, you've certainly gotten hurt.

Second, rising private and public valuations go hand in hand. Investors getting rich in one market are much more inclined to throw money at the other. So if private valuations start falling, and the easy money dries up, it's going to impact the valuation of public companies in the technology sector.

Third, there are select firms that are directly and indirectly exposed to the easy money-fueled bubble. Think of all the contractors, architects, office property managers, restaurants, caterers, entertainers, and others who serve the tech firms I mentioned earlier. Or what about the online brokers, banks, asset managers, and financial firms that have helped lend to and fund them ... or that have benefitted from the vast new wealth boom/bubble the mania has generated?

Bottom line: We're facing a potential sea change here, from a world awash in easy money to one facing tighter money for the first time in several years. As that tide recedes, it's worth watching to see what impact that has on the tech sector and tech stock valuations.

They've held up fairly well so far. But then again, things looked great right up until March 2000, too.

Until next time,

Mike Larson


The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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