With 2016 now in the rearview mirror. The one thing that was supposed to be included in that vision was the successful resurgence of IPO’s across “The Valley”. 2016 was supposed to be “the year” of the comeback for unicorn cash-out dreams after what can only be described as a “not as advertised” 2015. For if one needs remembering: 2015 was the worst year for tech IPO’s since 2009.
Here’s another problem nobody seems willing to discuss: 2015 may have been the high-water mark going forward when compared to 2016. Yet, not too worry we’re told! For has been reported via many a media source 2017 is shaping up be? Hint: The year it comes back.
Here is a chart from an article just this past August titled “Tech IPO Clog Poised To Burst” To wit:
The prevailing premise, once again, throughout “The Valley” is that “next year” should be the return of those unicorn dreams. After all, how could 2016 be any worse than 2015 was the premise at the beginning of year. The issue? Look at the above chart for clues. Or, as we like to say here in reality, “A whole lot worse!” For 2016 now makes not only 2008 look good. It makes 2009 look terrific in comparison.
Yet, this hasn’t slowed down one next-in-rotation fund manager to proclaim how “social” or “tech” is just “crushing it”. The real issue is that many who have “invested” based on a lot of this trite have found their portfolios have been the ones getting crushed. Case in point: Twilio™. To wit:
Now I’m not intentionally pointing out this company for any other reason than its IPO was proclaimed across the media and “The Valley” as to be “the” one as to show just how resilient not only the demand for IPO’s would be, but also how “worth it” their heralded valuations were. Once again, the problem? It did just that.
I have read articles emanating from “The Valley” as late as only weeks ago where it’s touted Twillio’s share price is up over 111% since it’s IPO. Sounds great, but it’s not only disingenuous, it’s damn right shameful to use that as the sole metric for validity to the premise that IPO’s or “tech’s” resurgence when looking at the above chart. For if you are one of the unfortunate that bought shares on the open market only a few weeks after the IPO? There’s no “crushing it” gains for you – you got crushed, with probably more pain to come.
There was also another “It’s different this time” proclamation which was supposed to prove 2016 to all the “nay-sayers” just how much people like myself “don’t get” social/tech/The Valley/etc. For it was we who needed to see the brilliance of their decision-making processes. And none was so heralded as to what 2016 was supposed to be than the resurgence of Twitter™, with its now multi-tasking CEO.
How did all that work out? Well, as they say in “The Valley”, let’s look at another “picture” shall we?
Again, all I’ll say to the above is this: If this is what the term “crushing it” now means in “The Valley”? I envision 2017 is going to take crushing up to 11!
So with all the above for some context. No opinion for comparison would be complete without also including the “holy grail” of everything tech/The Valley/IPO’s, and more. Let alone all that it is said to encompass: Facebook™ (FB).
Now one couldn’t be held for lying to state FB stock is indeed up since the end of 2015. However, would that be telling you the “truth” if one was to only state that one metric? Especially if you were trying to get a correct handle of the “health” or “potential profits” still promised in the “everything social” land of riches arguments?
As I highlighted on the chart above: If you purchased shares on Feb 1st of 2016 after what was heralded as an earnings report that “crushed it”, and was touted as (here’s that term again) “the” earnings report to shut all the “doom-and-gloomers” up once and for all. Guess what? Hint: You’re right back where you started.
And for those who decided 2016 was indeed the year where “tech” resurged and was caught up in the whole IPO of the afore-mentioned Twillio in July? It’s more than likely FB in 2016 is now a wash at best, a painful loss at worse. For it fell over 15% lower a mere 45-ish trading days later after those “lifetime highs” to end the year.
However even that doesn’t really encapsulate the whole. For if one can remember (after all it was just these last few weeks) the “markets” have been on an absolute tear to make (once again) never before seen in the history of mankind highs. And what was FB’s valuation doing during all this? Hint: Look at the chart above. e.g., The exact opposite.
Another meme that keeps getting perpetuated is the argument “There’s still so much V.C. capital just looking for investment it must surely mean these companies (i.e., The Unicorns) have legitimate ‘so worth it’ valuations for further cash-out riches. This alone proves the nay-sayers don’t know what they’re talking about.” To which I say: Really? Then let’s argue a few points shall we?
Let me start with this one point: If I said to you, “Hey, want me to show you how to make $1.00 into millions”? You’d probably wouldn’t even dignify the response with a no, you’d just walk away for you knew (at least I hope you would) if it seems to good to be true, it probably is. Now, with that said answer this:
How is “investing” some trifle sum (e.g., a few $Million) which instantaneously gives one the ability to claim they’re worth $Billions any different? Couple that with – the metrics for those claims are all based on “because they say so”.
Yes, the accounting for said valuations are based on 1+1= whatever we say it is. Not anything which is based in reality as you or I may understand. Or said differently: It makes Non-GAAP accounting look down right conservative in comparison.
This is the dirty-liitle-secret in the underbelly of all that is “unicorn” in my view. And sooner, rather than later, I believe this spurious type of accounting will someday find its way into the courts and be abolished. However, that’s for another day.
If you want an example? Try to square-the-circle that Theranos™ (remember them?) along with its founder Elizabeth Holmes was not only said to be worth, but was proclaimed throughout the business media that she personally was worth a fortune of $4.5 BILLION dollars. While the company itself was worth some $9 BILLION based on what I found to be one of the best lines (as in the form of a question) I can remember that came back in July from a Fortune™ article. The line?
“How on earth did it [Theranos] manage to raise $400 million in funding at a $9 billion valuation?”
Yes indeed, it was a good question. Problem was people like myself have been asking that of unicorns since 2008. Not after one of its most proclaimed archetype’s crashes and burns where even the likes of Icarus himself might marvel.
And speaking of “unicorns”. As 2016 has now come and gone what are we supposed to infer by the ever-increasing troubles emanating from the prized “decacorn” holding stable? (e.g., The Uber™, AirBnB™ types et al)
It would seem with every passing day (which has now morphed into years) waiting for that “perfect” cash-out point as to IPO seems to only be met with one reglatory hurdle after another. Which could, if found the ruling/rulings go against them, eviscerate their valuation-gone-wild models/metrics that would make even a glue factory blush for efficiency.
Uber is being sued (again) based on workers wages, classification, and more. China is now an after thought which in 2016 was supposed to be its primary goal if I’m not mistaken. And AirBnB still has its regulatory hurdles to be weeded out through the courts. If many of these go against them, then they face an all too, and very real valuation problem do they not?
Oh, yeah, and don’t forget “decacorn” stands for a unicorn worth $10’s of BILLIONS in valuation terms. You know where “The Valley” states reality for making the argument that a so-called “glorified taxi-app” is said to be worth more than the likes of GM™, Ford™, Nissan™, Hyundai™, and others, because “Its disruptive”, so of course “It’s totally worth it” and it must be worth more.
That’s not hyperbole on my part. You can find those exact words and arguments across the media and especially anywhere that’s Silicon Valley centric. Again, truly ponder that last statement. And if in the end you can’t shake an image of a sock-puppet from entering your mind? Don’t worry, I believe that proves you can still think clearly and understand true reality.
So now why has all the above happened? And why do I believe there’s far more of a “dark side” to all this “it’s different this time” fantasy world that Silicon Valley or “The Valley” as I like to say hasn’t a clue is on the horizon?
Here’s the equation I believe will not only send shock waves, but will bring down many a valuation edifice within “The Valley” in 2017. And here it is:
First: The Fed. And Second: Rate hikes.
Two very short sentences containing nothing more than two words each but their implications could have exponentially explosive results. For what they portend is that “It’s different this time” may indeed be exactly that.
What I hoped you may have noticed during this discussion is the one thing myself and very few others pointed out would happen if the hypothesis we’ve been articulating over the last few years was correct. That hypothesis has always been “Without the Fed. pumping in unlimited funds via the QE programs, and a “death-grip” to the zero bound (aka ZIRP) the first ones to show how much of a facade these “markets” where would be seen directly in the “tech” space.
Notice anything similar in any of the above? Hint: Without QE, everything came to a screeching halt at best, and a complete reversal of fortunes for many at worst. And I believe it’s only just begun. Why?
This past December, much like the one in 2015, the Fed. once again raised rates. However, this one in-particular is the one that may catch a lot of onlookers (especially most of the financial press) by surprise, and it’s for this reason:
If you watched the presser (and I suggest one do just that) following the rate hike given by Ms. Yellen, one thing is very front and center: She vociferously argued, or defended the idea of not only raising, but raising more than many presumed (now the working number of hikes is up to 3 from 2) coupled with her again animated defense of possibly even raising more, and more quickly should the Fed’s assessment to anything “fiscal” coming out of congress warrants it. When only weeks before she was arguing a possible need to run a “high-pressure” economy. That in-and-of-itself is a 180 from her (e.g., The Fed’s) implied stance.
(Just to clarify: “vociferously” and “animated” for Ms. Yellen is my assessment as I compare to her characteristic usually monotone readings or discussions at other events. Your interpretations may differ.)
So now with the 800lb. “It’s different this time” gorilla in the room I’d like to make a hypothesis for you to consider. I’m not saying “prediction” because that’s for fools. Nobody, and mean just that no-body knows what the future holds. All we can do is “look at the charts” (i.e., teas leaves) coupled with our best assumptions of what is correlation and/or causation, filtered through any acumen we might have gained over the years, then hopefully put ourselves in the best position for either possible gain, or to sidestep harm. Nothing more.
If we look only at the above charts to my eye one thing can be rationally inferred: Without the Fed. the “everything social” argument is D.O.A. Period.
What can also be logically asked is this: Why did FB’s valuation begin dropping and has never recovered during which supposedly as we were all being screamed at that “They were crushing it!” in every metric or mobile assumption. Again, it was touted as “You nay-sayers just don’t get it!” And yet, their valuation kept falling? And continued in the face of a rally into year-end that’s now gone into the record books under the classification of “historic”?
Was this in part due to a reasonable assumption that the one buyer who was buying so much stock in FB during 2016 promptly decided if the Fed. was indeed going to raise it couldn’t buy any more out of concerns of future funding costs?
Oh, and just to clarify – that buyer was the Swiss National Bank. Second to none in its FB shareholdings. Yes, even to Mark himself.
And if one can answer “yes” to that question in even a remote possibility, then what does that do to a whole lot of other companies within the “markets”? Hint: Here’s just one article for you to ponder coupled with the above implications. To wit:
Once again I can’t make this argument more forcefully than what the “tea leaves” or “charts” imply surrounded with the rationalization that the Fed. may indeed be far more aggressive in hiking with this new administration in power than the previous. And if that has even the remotest possibilities of being true? Based on what one could reasonably infer that took place over 2016 in total?
“It’s different this time” may take on a meaning never dreamed of within Silicon Valley, “The Valley”, and in particular, the “markets” as a whole.
And if I’m wrong, I’ll just leave you with one last point to consider…
If there’s so much more room to go in the “everything social” model as is professed via the media and every next-in-rotation fund manager that can elbow their way onto a television set. As one of my favorite Batman® characters was fond of saying, “Riddle me this!”
If FB, and or the “everything social” model is still in its nascent beginnings with so much more room to grow? Then why was Mark Zuckerberg ready, and seemingly willing in 2016 to sell his shares, and leave FB with the very real possibly of having to give up control to go into politics for two years? You know – if FB is the end all, be all of the “everything social” argument?
All I’ll say is this: “The Valley” had better be hoping – it is a whole lot different this time – than what it may end up being.
We shall see soon enough.
© 2017 Mark St.Cyr