The Approaching Silicon Valley Meltdown

To say that we are living through precarious times seems to be an understatement. Whether one lives in the so moniker’d “developed world, emerging, or frontier” there seems to be one constant currently: No one seems to be able to accurately ponder what tomorrow may bring, whether its political, economical, social, or combination there of.

The only thing constant right now is one of two things: Either, further instability is on the horizon. Or, complete and utter chaos is already knocking on the door. (See Kim Jong-un or Robert Mugabe for clues.)

Stability, the once deemed word for progress throughout civilized society now seems, to have devolved to mean, at what point of the instability around them they’re currently coping with. i.e., If you’re currently muddling through economically while dodging being a statistic, as the term goes, that currently means you, or your situation, is currently “stable.”

This now applies to not only people, but business, as well as politics worldwide. If you think I’m exaggerating? Hint: Hollywood. Need I say more?

However, there has been one outlier, for the most part, which seemed to skirt around all the current chaos, relatively unscathed. That would be Silicon Valley and all its ancillary provinces aka “Disruptive Tech.”

So far the coveted group known collectively as “FAANG” (e.g., Facebook™, Apple™, Amazon™, Netflix™, Google™) seems to have held the “barbarians at the gates” known as investors relatively at bay, or “stable” in their positions, if you will. What has been, anything but, is their cohort of IPO brethren that were supposed to have joined them.

“The Valley” seems to fit nicely as a moniker for a now self-recognized nation-state, after-all, if you include the market cap of these and a few others (e.g., Tesla™ and more) their combined valuations rival those of sovereign nations.

For all intents and purposes one could say they’re already developing and embracing their own newly formed currency, aka “Bitcoin™.” All that’s needed would seem is proposing a charter, and recognition.

And that’s why it’s all about to burst, in my opinion. All of it. Why?

Just as there are always clues, it’s in the consistency of further developments, along with weighing any prior, coupling them with the current, then trying to extrapolate whether or not they still stand, or are valid. This is the work most people (especially those paraded across the sycophantic mainstream business/financial media) won’t do. And not doing so for many – as of today – will have ramifications, maybe for a lifetime.

So what’s the “Why?” Of course, it’s only my opinion, but I stand behind it more fervently than ever before. And it is this…

“The Valley” (and its entire ancillary complex aka “the disruptor class”) is on the verge of receiving a wake up call, the likes, that may make the dot-com era look relatively “stable” in hindsight.

To use the political as an analogy, let’s just say, I believe the newly formed “nation-state” of FAANG will have much more in common with the turmoil in Brazil, Spain, Venezuela, and a few others in the coming months as it continues to desperately cling to the mythical Utopia of magical creatures known as unicorns, and cash out riches known as IPO’s. That “Utopia” has already been found to be a Potemkin Village made of spreadsheet papier-mâché analysis and valuation metrics, not worth the digital paper they’re written on.

But what has been far more important over the last few years is this:

Every-time a unicorn has rung its IPO bell – it’s been marched subtly off the so-called “trading floor”, directly to the glue factory door, onto another floor, aka the “killing floor.” Where it and its so-called “lucky” IPO debut investors, along with their wallets, met the same fate.

It’s been a “rinse floor and repeat” proposition going now for nearly 3 years. You know what else happened about 3 years ago? Hint: Quantitative Easing (QE) officially ended. I’ll contend that’s causation, not correlation. A very important distinction and difference, along with what it portends going forward. For as I iterated prior – there are always clues.

Back in April of 2015 as the effects of QE3 had yet to be realized (official end was Oct/Nov 2014) “The Valley” was still in complete euphoric mode. It was during this period I penned the following:

From the article, “Bubble Confirmed: From Sock Puppets To Action Heroes” To wit:

If the stresses now rearing their head within the markets continue I’ll make a prediction.

What you’ll not find more of going forward is VC’s strewn across the skies dawning capes and spandex searching through an ever-expanding universe of start-ups to fund. No. What you’ll find is a lot of the once so-called “wonder companies” that were previously funded desperately seeking additional funding of any type possible. Not to expand, or to buy the next greatest “eye balls for dollars model” to compliment their existing “now desperately seeking eyeballs for dollars” model.

What they’ll be in is a frenzy seeking funding – for their very own survival. Because Non-GAAP “We’re killing it!” earnings reports won’t do the most important thing in a recessionary downturn alongside the reality of no more “free” money.

As of that writing there have been far more tales of unicorn woes than anything else. Hint: Snapchat™, Twilio™, Blue Apron™, just for a few recent examples.

Then of course we have the “stable-mates in waiting” decacorns that were supposedly so ready, so fantastic, so disruptive, so _______(fill in the blank) that when they made their procession down to the IPO “floor” everyone would be dazzled.

Of course I’m speaking to Uber™ and such. How’s that all working out? Hint: The valuation was supposedly cut to around somewhere in the $40’s with Softbank™ supposed interest. Yet, that was before the latest fiasco in London was calculated in, or should I say, out? e.g. “Uber London loses license to operate.”

Hmmm, wonder what it’s worth today? I have a feeling nothing with a 4 handle, or even a 3, but that’s just a feeling. But if it stays private? Sky’s the limit when you’re the one doing the valuation metrics, right? Just ask them.

Remember when Snapchat was about to save the IPO world? (and if you’re one of the “lucky” to get in at the IPO, you have my condolences) This was the company that for all intents and purposes was going to show everyone that dared question the power of “The Valley” and their incessant hold to the “It’s different this time” meme that it was they that were in fact “the chosen.”

And they did just that – and were chosen to join the others in the IPO hall-of-shame with no redemption for both their valuation metrics along with many an investors wallet. You don’t hear about investors wallets anymore,but did you hear how “Billionaire Snapchat CEO Evan Spiegel and supermodel Miranda Kerr are a having a baby“? IPO’ing just-in-time does have its advantages, does it not? Again, if you were one of the debut “fortunate”, again, my condolences.

Yet again, Who’da a thunk such a thing even possible when the entire main stream financial media was in near blissful, rapturous fascination with both the product along with its story?

Hint: From the article, “The Big Snapchat IPO Question: Will Investment Dollars Also Go Poof?” To wit:

In my opinion: This isn’t a good sign if you’re the supposed “David” in “The Valley’s” version of “Goliath” killers. Especially if you’re simultaneously held to be the IPO savior of tech. And there’s only one thing worse than “expectations” not being met, even if it is hopes, or dreamlike infused wishes.

What’s that you ask? Hint: When you state publicly that your business, a business that is looking to garner other people’s money who will someday be looking for a return on that investment read – they may never find that scenario ever possible.

Think I’m kidding? From their S-1 filing, page 19, in bold, italicized text. To wit:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”
So, I’m going to ask you a question from a business standpoint: Why in the world would you include such a statement?

Some will argue this was just some boilerplate legal mumbo-jumbo that is constructed and stated in more differing ways than there are ants on the planet, and needs to be included somewhere within the fine print, where all this form of legalese gets inserted to be glossed over. And that would be a fair argument. However, if that’s the reasoning: Why in the world would you make this statement front, center, and unable to miss?

Unless?

When it comes to that “unless” question, there’s only one question I feel answers it. e.g., “Too soon?”

I’ve made a myriad of arguments in articles on basically the same theme over these last few years, and most have fell on deaf ears. Yet, as the “markets” have continually gone higher any coverage for these so-called mythical companies seems to have gone from front-page news to the obituary section, where again, no one wants to read for fear it might be theirs to be read next. Unless they’re having a baby. If then, see above.

Yet, there are glaring signs that should be laid out and parsed for what they may portend in the very near future, coming from what has now been classified as what can only be called the “never gonna let you down” family of all that “The Valley” holds dear. e.g., The FAANG family.

First, there’s Apple. As of now the new phone seems to be a hit. (To be clear, I’m an Apple product fan and user) However, what seems more than troubling is that the entire Apple mystique seems to be not only unraveling, but falling into atrophy.

Differing product rollouts (think wireless ear buds for one), software upgrades that are actually downgrades (as in features once favored by power-users suddenly vanish in their entirety) missed or delayed shipping dates, sufficient product inventories and/or availability., and on, and on. And yet? The CEO, Tim Cook, the once heralded operations aficionado seems to have plenty of time allocated concerning political statements be at the ready for consumption, rather, than all of the Apple products still in limbo. (Think Mac Pro® for another)

There’s just something not right with that entire situation, and I believe there will be backlash to be paid in the coming future. If so. the ripple effects are going to be well felt. However, when it comes to Apple – they run a business that generates net profits, massive at that. If there is any seismic activity in “The Valley”, Apple might not only fair the best, but actually benefit from it. But that’s for another article.

Then there’s Facebook and Google, the ultimate “ads for eyeballs” representatives. Currently their numbers seem to be “hitting it out of the park” as is portrayed ad nauseam via any next-in-rotation fund manager. However, as I’ve opined far too many times to count, I believe that is the result of failing ads-for-eyeballs campaigns concentrating their efforts to the two remaining points, where a return for those ad dollars has even the remotest shot of providing a sale.

If true value and efficiency was the reason for these two entities to receive, now, nearly 2/3rd of all the digital dollars being spent across all of social or digital media. If this were true, it begs the question: Then why are the largest ad buyers in the world for mass marketing products pulling their ads from these venues consistently? Hint: type “ad fraud” into your search engine of choice)

I contend their gains go hand-in-hand at approximately the same rate, as all the competitors lose the equivalent amount.

All one has to do is compare what were supposedly the next “kings” for further “ads for eyeballs” riches losses with these two ever-increasing gains. I content, after this retail season concludes, so to will those gains. And that alone will change everything, and I do mean just that – everything – for these two current FAANG rulers.

Then there’s of course Amazon, Netflix, (and how can one leave out) Tesla. Here’s where one question will become paramount when, or if, things become slippery. That question is: Where’s the money? aka Net profits.

Every time there seems to be a questioning of valuation in any of these companies one thing is for certain: Future Hype makes it appearance, again, and again, and again, and again. Tesla has now made it an art-form. Need proof? Fair enough, to wit:

As Tesla wrangles with production failures and more, suddenly the stock appears vulnerable – then just like magic (or clockwork to be precise, but there’s a mix of both for sure) Mr. Musk dons a stage and venue and rolls out the “next big thing.” This time, its “Semi-trucks, and a new “Roadster.

All sounds just fantastic, right? Well, it is, what’s even more fantastic will be how Tesla finds the time to do any of it as its current state of affairs in delivering already claimed vehicle production falls further, and further, and further behind schedule. Which begs the question: Does this P.T. Barnum effect begin to wear thin on already promised riches that aren’t showing up? The share price seems to be showing the “effect” is no longer the catalyst to unseen black-sky territory as it once was.

As I stated in the article, “Future-Hype Arrives Right On Cue… Again” To wit:

…I cavalierly made the comment that Elon Musk and Jeff Bezos would nod their head in approval. For this has become so blatantly obvious to anyone paying attention, it’s now downright comical.

Why? As I’ve been stating for years – It’s all about how to play the headline reading, algorithmic, front running, HFT, trading bots.  Hint: Remember how every time it seemed Amazon™ stock valuation was questioned there was suddenly barrage of “news” about drone deliveries? All coincidence I’m sure. After all it’s not like it worked for the Fed, right?

Now its electric semi trucks, and for Amazon, it’s now about taking over the government procurement supply chain. What’s next rocket ships to Mars? Wait, I’m sorry, I already forgot, that was last cycle. It’s getting harder to keep up.

Silicon Valley and its now representative, amalgamation of companies collectively known as FAANG currently seem invincible to the warnings signs building up all around them. Much like in the early stages of the dot-com era where upending calls for caution were met unheeded, or just-plain-out dismissed with a vengeance.

But that’s the funning thing about reality, especially when the pendulum reaches the final height of its swing. For once it does, it comes back the other way – with a vengeance.

The issue this time is this: On the upstroke was where “cartoon superheroes” and “it’s different this time” magical thinking with childish abandonment was not only rewarded, but seemingly reined supreme. Until…

Hint: The main course on the table this week thought the same, until.

Oh yeah… And meaningful Tax Reform will be passed before year end.

© 2017 Mark St.Cyr