Author Topic: Why I think we might be in a significant tech IPO bubble  (Read 3020 times)

cameronfen

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #10 on: April 17, 2019, 06:22:19 AM »
also if you can't find value I would suggest looking in foreign (English speaking I mainly stick to for maintaining a baseline "edge") markets.  South Africa is in a recession and I've seen small caps trade for 2 or 3 times earnings.  Most small caps trade for 6-8 and most are still profitable (or should be in a non recession enviroment).  Some things in Australia and New Zealand are interesting too. 

OT: Happen to know any good South-African tracker? I've just come back from SA and must say I was not impressed much by what has been going on over there. Electricity outages (so called 'load shedding') were a daily occurence and water shortages are becoming more extreme. Not to mention the social issues. Things don't seem anywhere near to turning around imo.

Fido has trading in SA.  I use that and dont know of trackers.  Also you have to keep in mind SA GDP is like a fifth of developed countries, so turning around is different than your expectations.  The recession is only -1% growth so it's actually a quite mild recession. 


ajc

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #11 on: April 17, 2019, 08:49:52 AM »


In 1999, interest rates were about 6% and inflation around 2%. That's a real rate of 4% and you had this bubble.
Today real rates are barely above 0% and there are trillions in negative rate debt.
It is quite conceivable that the most loss-making businesses trade for a fortune in this environment.
If 1999 was a bubble , this environment could be bubble squared.
Only gravity of higher real rates can perhaps rein in the madness but only if the escape velocity isn't reached before.
Who knows. Maybe rates will have to jump in 1/2 or 1% increments at some point.
However the party could continue onward for a while, after all pensions, insurers and citizens are in desperate need of return, even if that return is nominal and not a real one.




I think this is a smart way of looking at it and very concerning.
On a different but related topic, a recent Bloomberg article about duration noted "the debt load in the world is so high now that it canít withstand any historically-normal size of interest rate increases anymore" (https://www.bloomberg.com/news/articles/2019-04-12/hidden-bond-market-dangers-expose-traders-to-2-trillion-wipeout).

At the same time, lowering interest rates in a substantial way at a time when the US is already at full employment with 2.5% GDP growth would send one hell of a signal about the real strength of its economy.
In other words, I think there's kind of a sense in my mind where it seems like the Fed is a little boxed in and can't make any sudden moves either way. As you note, rates today are also so low that there are hardly any bullets left in case of emergency. Certainly far fewer than were available in the aftermath of the GFC.

Based on the charts below, it seems as well that all low rates have done in practice is to encourage far more irresponsible borrowing and unprofitable business of the kind that played a big part in the GFC.
The problem as I see it, is that this time central banks have very few to no bullets, government debt across the world is far higher and at a point where it can't be added to in a major way, and now net corporate debt compared to EBITDA is at levels that makes 2008 look like a picnic in comparison.

I hope I'm wrong, but it seems like we are reaching a point where there will be nowhere left to turn and the only choices that will be available will be extremely painful for a whole lot of people.
And I'd add that I think the trick that got pulled to solve our problems in 2008 is not really repeatable.
There are only so many bullets available and only so many times you can nationalize debt, or carry on giving cheap money to corporates, or lowering rates, until markets and people generally stop believing in your integrity and creditworthiness.

Again, it seems to me like based on the data we are pretty close to that point. The beautiful deleveraging I've heard about is not something that seems to be showing up from what I can tell. Anyway, I'm keeping an open mind and am looking for opposing evidence but right now I'm being very cautious based on all this.
It's not my intention to sound all Chicken Little, just trying to maintain a reasonable perspective.
So it's against this backdrop that tech IPO prices seem to be reaching exuberant levels and given how this stuff usually coincides historically, I'm not sure it's all that surprising.



DTEJD1997

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #12 on: April 17, 2019, 09:11:05 AM »
Hey all:

I heard a podcast the other day where a entrepreneur was interviewed about his company.

His company is a "subscription" coffee company.  They sell high end coffee and put an interweb enabled scale with it.  When your coffee gets down 75%, it automatically orders more coffee that is shipped to you.  You never have to worry about the complexity and difficulty of getting more coffee from the grocery store!

That is it, that is the business.

It is a multi-million dollar company.

Tech bubble?

SHDL

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #13 on: April 17, 2019, 11:24:00 AM »
Another thing to keep in mind is that we donít necessarily need a big recession for stocks (and long term bonds, especially corporate bonds) to go down in price over the next few years.  All we need is an uptick in inflation and an associated rise in interest rates.  To me this seems like the least discussed and most worrisome scenario because if this happens investors wonít be able to count on the Fed to bail them out.

gjangal

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #14 on: April 17, 2019, 03:04:27 PM »
Zoom, an enterprise video conferencing software going ipo at 9b . 27 times price to sales, growing at 100%. There are several competitors in the market.

Valuations looks crazy , but letís say they grow recurring revenue 50% cagr for 5 years, that would make this price not so crazy. Interesting times

ajc

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #15 on: April 17, 2019, 03:53:15 PM »


Zoom, an enterprise video conferencing software going ipo at 9b . 27 times price to sales, growing at 100%. There are several competitors in the market.

Valuations looks crazy , but letís say they grow recurring revenue 50% cagr for 5 years, that would make this price not so crazy. Interesting times




Closer to 28x going by CNBC's latest report of a 9.2B valuation.

I mean Zoom is an incredibly well run company and Eric Yuan is a tremendous CEO (see Alex Clayton's great IPO breakdown - https://medium.com/@alexfclayton/zoom-ipo-s-1-breakdown-119249acadd3), but if you include a first day pop of 25% the business will trade at around 35x sales.

As I explained in my thread (https://twitter.com/tonyjclayton/status/1118205158721249280), these are going on 1998/1999 level valuations. The data for the last 40 years is there for all to see (image below) and these are the most extreme P/S multiples except for the height of the Dotcom bubble.
Jumia (an African e-commerce business that has been compared to Amazon) went public a few days ago and popped 85% on its opening day. It now trades for 22x sales, even though it's loss-making and revenue only grew 38% last year.
Slack, which has already filed, recently traded at a 16B valuation in private markets (https://www.dealreporter.com/info/slack%E2%80%99s-valuation-could-reach-usd-16bn-direct-listing) or 41x their sales for 2018 where they grew at 76%.

Even if some of these are great companies with amazing futures (and clearly there are a number that are), the multiples being paid across the board are high by any historical standard and therefore this IPO market as a whole should probably be labelled speculative.
I invest in the consumer tech space myself so I have no ax to grind, but I think this current environment is excessive in its sheer width across the entire sector so even if you buy one of the best businesses you'll still suffer when the widespread exuberance inevitably fades and the entire space likely suffers substantial multiple contraction.



Spekulatius

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #16 on: April 17, 2019, 06:32:49 PM »
It is interesting that at a late stage of a bubble, you can see IPOís still popping, while older issues are weakening. Thatís when you know that liquidity is spilling from one vessel to another, but not much additional liquidity is coming in. It almost looks like that is what is happing right now.
To be a realist, one has to believe in miracles.

Castanza

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #17 on: April 18, 2019, 05:38:19 AM »
It is interesting that at a late stage of a bubble, you can see IPOís still popping, while older issues are weakening. Thatís when you know that liquidity is spilling from one vessel to another, but not much additional liquidity is coming in. It almost looks like that is what is happing right now.

Could you expand on this a little?

SharperDingaan

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #18 on: April 18, 2019, 08:01:32 AM »
It is interesting that at a late stage of a bubble, you can see IPOís still popping, while older issues are weakening. Thatís when you know that liquidity is spilling from one vessel to another, but not much additional liquidity is coming in. It almost looks like that is what is happing right now.

Could you expand on this a little?

Liquidity is coming almost entirely from the underwriting group, the issues are being priced at slightly below market (to evidence a marketing bump on issue), and underwriters are focused on volume (fees) - not quality. Get as much out the door as possible before the opportunity closes, and dump the inventory as quietly as possible.

SD

Castanza

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Re: Why I think we might be in a significant tech IPO bubble
« Reply #19 on: April 18, 2019, 08:11:16 AM »
It is interesting that at a late stage of a bubble, you can see IPOís still popping, while older issues are weakening. Thatís when you know that liquidity is spilling from one vessel to another, but not much additional liquidity is coming in. It almost looks like that is what is happing right now.

Could you expand on this a little?

Liquidity is coming almost entirely from the underwriting group, the issues are being priced at slightly below market (to evidence a marketing bump on issue), and underwriters are focused on volume (fees) - not quality. Get as much out the door as possible before the opportunity closes, and dump the inventory as quietly as possible.

SD

I see, definitely a good point. Ever since Venture Capital money has come into play, IPO's have been well, "disingenuous." These companies come out of the gates with massive valuations its hard to see how they are't set up for failure. Not sure if anyone watches the HBO series "Silicon Valley." But this show highlights some of these issues, such as being overvalued when you IPO. Also it's just a damn funny show.