Over the weekend I read the giant US fund manager, Fidelity Investments, has written down the value of its investments in high flying tech start-ups.
In May 2015, Fidelity bought into the privately-held Snapchat for $30.72 per share — valuing Snapchat at US$16 billion. In its September accounts, Fidelity had dropped the valuation to $22.91 per share…a 25% write-down.
According to the article Snapchat ‘is struggling to prove to investors that its efforts to attract advertisers are paying off.’
Now there’s a surprise…I jest.
In the 14 July 2015 edition of The Daily Reckoning I wrote:
‘And then there’s TBM2 — tech bubble mark 2. TBM2 looks like a re-run on TBM1 with one exception — now valuations are in the billions not millions.
‘Uber, Facebook, Twitter, Alibaba, WhatsApp et al all command 10, 11 and even 12 (in the case of Alibaba) figure price tags (I was going to say valuations, but in my mind the word “valuation” is an extension of value and there ain’t no value in these companies at these prices).
‘Here’s a personal disclaimer that I admit could cloud my judgement on the “value” of these businesses: I have never used Facebook, Twitter, Uber, SnapChat, Instagram or Alibaba. However I have used WhatsApp and not paid a penny for the service.
‘My children do however make use of some of these companies’ products — but they tell me, with the exception of Uber, they do not pay for the privilege. In my very limited sample group I am struggling to see how these companies make sufficient revenues to justify the ‘mind blowing’ prices attached to them.
‘This is what cheap and abundant money does — like a lotto win it makes people fail to appreciate the true value of money.’
Fidelity’s investment in Snapchat was part of the Blue Chip Growth Fund. You’ve gotta love the marketing types who dream up the names for these funds.
Since when has a company that makes no money been classified as ‘blue chip’?
The so-called ‘blue chip growth fund’ has struggled a little of late. Its investments in a few other privately-held companies have been written down by 30%. Fortunately the fund had an exposure to Uber that has helped save its performance bacon. But for how long?
The red ink in the once stellar tech sector doesn’t stop there.
In the 20 November 2014 edition of my advisory letter, Gowdie Family Wealth, I made this observation on GoPro:
‘Ever heard of GoPro? It is a waterproof camera you strap onto a helmet, surfboard, wrist or whatever to take video of you in action.
‘I know of this device because one of my daughters bought one for her action man partner.
‘GoPro is a nifty little gadget that’s taken the action world by storm. This “flavour of the month” mood has followed through to the company’s share price.
‘GoPro is a wink off being valued at $10 billion. This “crest of the wave” valuation is based on — wait for it — a multiple of 200 (yes, 200) times trailing earnings.
‘When investors discover GoPro can easily be replicated by strapping any Asian waterproof camera to your body, it’ll be game over. With such a low barrier to entry, it’s just plain dumb to attribute this level of valuation to GoPro.
‘Perhaps investors should take a picture of the current share price before it takes them on a not-so-thrilling downhill ride. My prediction is GoPro is going to experience plenty of downside action in the not too distant future.’
At the time I wrote the article GoPro was trading around US$70. Today the share price is US$21…a 70% fall in price (I am loathe to say value, because there was no value in this stock).
And who can forget the great fuss over the September 2014 US listing of Alibaba — the website with a portal to nearly every factory and fake in China.
The 25 September 2014 edition of Gowdie Family Wealth carried this article on Alibaba:
‘Investors have chased anything with a pulse.
‘Without access to cheap and plentiful dollars, how else can you explain the eye-watering valuations placed on Twitter, Uber, and now Alibaba? You can’t.
‘Alibaba has a market cap of roughly US$230 billion. Wal-Mart’s market cap is US$250 billion. Coca-Cola is US$185 billion.
‘Depending on the Chinese government’s good graces
‘But do shareholders in Alibaba know what they really own? They have shares in a Cayman Island company that’s entitled to the earnings of the mainland Chinese company. This earnings entitlement is conditional upon the good graces of the Chinese government, permitting this arrangement to continue.
‘The justification for the PE ratio of 32 on next year’s earnings is apparently explained away by statements like, “It’s cheap compared to Twitter and Facebook.”
‘This type of irrational thinking accompanied the valuations applied to tech stocks in the dotcom boom.
‘When money is abundant and cheap, value becomes irrelevant. But this phenomena is not limited to upstart tech companies.’
Alibaba listed around the US$94 mark, then dipped a little before hitting a high a couple of months later at US$115. Today it’s at US$76.
Alibaba’s magic carpet ride is spluttering. As deflation gathers momentum watch for the rug to be pulled out from underneath Alibaba shareholders. Identifying the downside in the pricing of the latest and greatest tech companies was not rocket science.
The same enthusiastic pricing happened in the 1920s when many automobile companies were listed.
The first tech boom in the late 1990s had the same crowd madness — pricing companies well beyond their earning ability.
Yet we have one of the world’s largest fund managers (and there are others with similar repute) falling for the same old trick. Young gun fund managers get their hands on investor dollars and think it is different this time and that they are smarter than history.
This is what makes me so uneasy about what lies ahead in the social, economic and financial spheres.
Please take care; there are challenging times ahead.
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