Category Archives: dotcom 2.0

tech stocks are still seriously overvalued

Seventeen years ago, I had a front row seat for the nuttiest mania in stock market history. I vividly remember visiting now failed companies like Quokka Sports, Planet RX, Women.com, and Commerce One and listening to their managements confidently predict glowing futures. These firms, and many more, sold above 100x revenues–and they were far from the most overvalued stocks in the market. Other public dotcom companies had no revenues at all. Their stocks soared on nothing more than hopeful business models and lofty expectations of explosive growth.

I was in the ninth year of managing my hedge fund in 1999. It gained 8 percent that year, badly lagging the S&P’s 19 percent return and the Nasdaq’s staggering 85 percent (!) gain. In March of 2000, the Nasdaq hit an all-time high of 5132.52. Then, on March 20th, Barron’s magazine wrote a much publicized article that listed every dotcom by its cash, monthly cash burn, and the number of months before each company would run out of money if it did not raise additional capital. There were 207 companies on that list. A large number went broke. Some of those flameouts, like Pets.com, live on in infamy. The majority of them are only recalled by hardcore stock junkies, especially those who got burned by their implosion.

Remember Be Free, ZapMe!, SmarterKids.com, drkoop.com, and MotherNature.com? Most investors under the age of 35 almost certainly don’t—and that’s a problem, because what happened to those businesses could easily happen to many of the new tech sector darlings. Far more companies in today’s public and private markets will probably become tomorrow’s drkoop.com instead of the next Amazon or Microsoft. And as we saw so vividly in 2000, when the end comes, it comes quickly.

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so you want to be a stock picker

After a rough start to the new year, a lot of investors might be tempted to buy into “fallen angel” companies at or near all-time lows. They’re not hard to find. In the tech sector, GoPro and Fitbit, two profitable and recently public companies, have taken major hits. GoPro is down 90 percent from its all-time high. Fitbit has lost two-thirds of its peak value. Another sector where investors might be looking to buy low is energy, where scores of service and exploration companies are down 90 percent or more. Established names like Denbury Resources, Forbes Energy, Gastar Exploration, Basic Energy, Bill Barrett, and Ultra Petroleum, among others, have all been creamed, and could seem like bargains.

All I can say is: buyer beware.

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silicon valley’s bubble is bursting

You’ve probably heard by now that last week was the worst opening week in stock market history. But even that horrid headline doesn’t quite capture the sheer scale of the carnage. In five days, the S&P 500 fell six percent, the Dow fell 6.2%, and the NASDAQ fell 7.3%. Small caps fared even worse than the major indexes, with the Russell 2000 shedding 7.9%.

And yet, as ugly as 2016 has been so far, I still see overvalued stocks everywhere I look, especially here in the Bay Area.

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social media stocks: #morepaincoming

Like many, I am surprised (and somewhat dismayed) by the popularity of social media. Personally, I have made some valuable connections on Twitter. But for the majority of people who habitually log in to social media platforms, I fear time spent on the sites is time wasted. And while all social media companies tout glowing statistics about the rapid growth of their user bases, I remain skeptical about the real social value—and commercial viability—of their products.

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orange might be the new red: original content could easily bleed netflix dry

I recently joined a group of other money managers for a meeting at Neflix’s (NFLX) Los Gatos, California headquarters. The company’s IR rep gave a concise 30-minute business overview, followed by 30 minutes of questions. I’ve never considered investing in Netflix and I probably never will. As a rule, I don’t buy or short popular, high-profile companies. But I have to say, I came away from that presentation more than a little skeptical about Netflix’s future prospects.

The company’s subscription service is a good, if not great business and its user growth has been impressive, but NFLX is an extremely expensive stock by almost any metric. Even after its recent selloff, its market capitalization still tops $40 billion vs. $6.8 billion in estimated 2015 revenues and roughly zero free cash flow in both 2015 and 2016. Its high valuation isn’t what worries me, though. Today about ten percent of the content available on Netflix is either licensed or created by the company. It plans to increase that number to fifty percent. To say this is an extremely risky move would be an understatement.

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tesla, fitbit, and what happens when wall street forgets a fad is a fad

As I highlight in the introduction of my book Dead Companies Walking, retired New York money manager David Rocker once wrote that there are three types of shorts:  fads, frauds and failures. I generally focus on the latter of the three by seeking out and shorting troubled companies that could soon go broke. Shorting fads, on the other hand, is tricky. Timing is everything, and predicting exactly when a fad fizzles out is almost impossible. Remember “Pogs,” those weird little toy discs that kids briefly went nuts for a while back? It seems unbelievable in retrospect, but two Pog-related companies came public during that mania. Both went bankrupt soon after the craze subsided, but if you’d shorted either of them beforehand, you would have needed some serious intestinal fortitude to stay in the position.

The trickiest fad businesses to short are the ones that grow so popular in such a short time, even seasoned investors become convinced they will turn evergreen. This is particularly true for products that are popular among financial workers and the broader investor class. After all, if the folks buying, selling and analyzing stocks love a company’s products, they’re more likely to overestimate its value and its longevity. As I write in my book, an analyst at a prestigious brokerage once swore to me that there would soon be ten times as many rollerbladers as bicyclists. Before I hung up the phone and shorted the stock of the second largest inline-skate maker at the time, she happily informed me that she and many of her colleagues were avid rollerbladers.

The two biggest “stealth fad” stocks in today’s market could very well be Fitbit (FIT) and Tesla (TSLA). Neither is likely to go the way of Pogs or rollerblades, at least anytime soon. But, like rollerblades, they’ve both benefited from their excessive popularity among the very people buying and analyzing their stocks.

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once bitten: will the “FANGs” keep feasting?

Jim Cramer has been talking up what he calls the “FANG” stocks again: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). Cramer has touted these stocks for several years now, and for good reason. They’ve far outpaced the market in that time. Throw in a second world-beating “A” stock, Apple (AAPL), and the five companies are worth a staggering $1.8 trillion in combined market capitalization, or roughly 17 percent of the NASDAQ composite and 9 percent of the S&P 500.

There’s no doubt about it: if you haven’t been in these stocks over the last few years, it’s been damn near impossible to beat the indexes. (And God help anyone who dared to short them.) But, past results aside, will the FANG stocks continue to bite off big gains in the future? Investors certainly seem to think so. Facebook’s early struggles as a public company seem like ancient history. Last week, Google added almost $60 billion in market cap in a single day and Netflix popped ten percent on strong user growth. As for Amazon, it just keeps heading higher and higher, profits be damned.

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today’s tech boom is missing something: technology

I’ve been buying and shorting tech stocks since floppy disks were floppy. In all that time, I’ve always been amazed at the steep premium investors are willing to pay for anything even remotely tied to the sector. In the 1990s, all you had to do to command a massive valuation was slap a “.com” onto your name. That is not an exaggeration. In 1998, I shorted a company called 7th Level that was two weeks away from running out of cash. It changed its name to 7th Level.com and its stock jumped from $2 to the mid-teens in a single day. These days, private companies in the tech space–so-called “unicorns”–are all the rage. Few, if any of these billion dollar babies have earned a cent. Commonsense says most of them never will. And yet, VC firms and other private backers are perfectly willing to throw more cash at them in round after round of financing.

Investors justify these lofty valuations with fanciful TAM guesstimates and accelerating revenue projections. This is nothing new. It’s the same wishful thinking that drives all manias, tech or otherwise. But what seems different to me about the current tech boom is just how un-technological most of the players are. Uber lets you hail someone else’s car, AirBnB lets you sleep in someone else’s bed, and Snapchat lets teenagers erase naughty messages before their parents see them. It’s hard to see any significant technological moats around those ideas.

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a twitter buyout? don’t hold your breath

We’re in the middle of a buyout frenzy for the ages. Every day brings news of another mega deal, either real or imagined. On Sunday, Cigna rebuffed Anthem’s $47 billion offer. This failure-to-merge is a rare exception. Many large and established companies have successfully gobbled up other large and established companies in recent weeks, especially in the tech space. In March, NXP Semiconductor bought Austin-based Freescale for almost $12 billion. Singapore’s Avago paid a whopping $37 billion for Broadcom a few months later, and Intel recently completed its $16.7 billion acquisition of Altera.

This merger mania is partly a product of record low interest rates around the globe. Profitable, cash rich firms can sell bonds with vanishingly low interest rates, making major acquisitions relatively easy (and cheap) to finance. Furthermore, the US tax code encourages firms to borrow money, as interest costs are treated as a deductible business expense. Add it all up and it’s little wonder that every company out there is starting to seem like a viable takeover candidate.

But let’s not get carried away.

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could this be the beginning of the end of the social media mania?

I’m kicking myself for not following my instincts and shorting Yelp (YELP) before it announced utterly rancid earnings last Thursday. For years, the only thing that has mystified me more than Yelp’s business model has been its enduring popularity with Wall Street. As I type, I’m looking at a pile of recent analyst reports with absurd price targets for the company. I like to save these kinds of laughably optimistic reports. It’s a hobby of mine. I’ve still got a glowing buy recommendation for Enron dated only days before the energy behemoth imploded.

For all my doubts about Yelp and other social media stocks, there’s a good reason I have not shorted any of them up to now. It’s just too risky to bet against companies in the midst of a secular mania–and make no mistake, that is exactly what has lifted Yelp, Twitter, LinkedIn and their ilk to stupidly large valuations that they will almost certainly never live up to.

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