Saturday, December 6, 2014

Barron's Cover: Tech Stocks--The Bubble Is In the Private Market

There are two things that have changed over the last couple decades in valuing soon-to-be-public companies:
1) Long gestations to accrue every bit of hyper-growth from successful business to the private owners.
2) Late round valuation bumpers, a tactic we first saw in Kleiner, Perkins deals, note below.

From Barron's:

Tech Stocks: Sizing Up the New Bubble 
Investor worries about another dot-com-style stock crash miss the point. The bubble is in the private market.
Barron’s shook stock markets around the world nearly 15 years ago with its “Burning Fast” cover, showing that many of America’s highflying, unprofitable Internet stocks were about to run out of cash. In the month following our story, the Nasdaq fell 31%. That was the start of a two-year 78% slide that became known as the Dot-Com Bust.

In recent months, as the Dow Jones Industrial Average and the Standard & Poor’s 500 repeatedly hit new highs, and the Nasdaq finally looks poised to vault past its all-time high of 5049, fears have been raised about the possibility of yet another market collapse. While we agree that some overvalued, money-losing companies like Twitter (ticker: TWTR), Workday (WDAY), and Splunk (SPLK) do recall the dot-com mania of 15 years ago, the situation today is fundamentally different. We say this knowing that the most dangerous words on Wall Street are “This time it’s different.”

What’s never different, whether on Wall Street or Main Street, is that a company eventually needs to earn a profit to stay in business. That was the basic truth behind our March 20, 2000 “Burning Fast” story, and it’s the first factor we considered in evaluating today’s market, particularly social-media plays.

Judged by profits, the stock market is much more reasonably priced than it was in 2000. The Dow now trades at 15 times next year’s expected earnings, versus 18 times back at the peak of the boom. The S&P 500 trades at 17 times earnings, versus 30 times. And perhaps most telling,the Nasdaq trades at 22 times earnings, against 102 times back in 2000.

To assess the health of today’s market, we turned to Greg Kyle, a senior securities analyst at Bates Research Group in New York, the very fellow who analyzed Internet stocks for us 15 years ago. What Kyle found is that today’s newly public tech and social-media companies are not only bigger, stronger, and more seasoned than their counterparts from 2000, but they’re also more profitable. “Newly public companies today have better balance sheets and generate fewer losses than they did in 2000,” Kyle says.

IN OUR ORIGINAL STUDY, 51 Internet companies were on track to run out of money within a year, including names such as, Healtheon, and eToys. (See Table, The Original Barron’s List: A Prelude to the Dot-Com Bust.) In the latest analysis, just five companies look like they will run of cash in a year’s time. And all of them are quite small, each valued at less than $360 million. Indeed, you may never have heard of these little cash burners: CafePress (PRSS), Cyan (CYNI), Silver Spring Networks (SSNI), E2open (EOPN), and Audience (ADNC).

For the new study, Kyle analyzed the 80 Internet and technology infrastructure names that have gone public in the past three years. They carry a collective market value of $380 billion. Fifty-five of them, or 69%, are posting losses.
That’s not great. But the situation is far better than it was in 2000, when 74% of the 280 companies Kyle surveyed were unprofitable. 

The total operating profit of today’s 80 newly public companies was $1.6 billion in the most recent quarter, though it’s important to note that Facebook (FB) accounts for the bulk of those profits. Exclude Facebook, and the companies’ operating profit still totals $178 million. Compare that with 2000, when our Internet stocks were collectively losing $5.1 billion per quarter. 

Kyle didn’t include Alibaba (BABA) in his survey because it trades as an American depository receipt. Alibaba earned $708 million in the latest quarter, which would have boosted the group’s profit figure still higher.
So why are well-known venture capitalists like Bill Gurley and Marc Andreessen warning of a new bubble? The answer lies behind closed doors, where the market for privately owned companies has become today’s version of the Nasdaq in 1999. As of September this year, according to Dow Jones Venture Source, the median late-stage venture-capital-backed company was valued at $250 million, a record high and far larger than in the bubble days, when the median private-company valuation peaked at $89 million.
With interest rates low and so much money flooding into the private markets, there’s simply no rush for startups to issue stock to the public. “You’re commanding a public market valuation as a private company,” says Andrea Auerbach, a managing partner at Cambridge Associates, which advises institutional investors. 

In what might be Silicon Valley’s greatest sea change, founders no longer need the public markets to raise funds to expand their businesses or to get some money out of their companies and into their own pockets. Venture-capital firms provide plenty of late-stage capital, and they’re being joined by mutual funds and hedge funds that want in on the private party....MORE

*In August's "'No Bubble At All: Jessica Alba's Diaper-Delivery Startup Is Valued At $1 Billion, Prepares For IPO' (we're more interested in the Snapchat final round)" it was pointed out that Kleiner Perkins made  "a laughable $20 million" last round investment into Snapchat at a $10 Billion valuation thus lifting the 'value' of all prior investments from the prior year's $800 mil.

This was a role Kleiner used to assign to an outfit called Advanced Equities which we had been following from Aug. 15, 2008's
Venture Capital: "Garbage In..."
From Forbes:

A late-stage venture funding outfit is foisting junky startups on investors--much to the benefit of the Sand Hill Road crowd.

It's just the sort of improbable success that Silicon Valley adores....
To November 2012's "Phi Scamma Jamma: Late Stage VC Investor Advanced Equities Shutting Down (Bloom; Fisker etc.)":
That's a wrap.

These guys would do middle-of-the-alphabet rounds (H-round, N-round etc.) that the Sand Hill Road crowd owned at 1/20th the valuation. They invested private placement style for accrediteds, giving the original VC's a nice bump in valuation while the AE principals got to act like they were in with the in crowd....
Good times, good times.