“Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks.”
– How The Second Tech Bubble Will Burst, In The Words Of Silicon Valley’s “Poster Child” And World’s Youngest Billionaire (ZeroHedge, April 23, 2015):
Back in December, following the Sony email leak, the world was granted a second (again uninvited) glimpse into the private life and thoughts of the person who had previously suffered another email leak, this time exposing his fraternity days explots: Snapchat founder and CEO Evan Spiegel.
And while many have been quick to mock Spiegel for some of his boyish ways, the reality is that the not only is the 24-year-old the world’s youngest billionaire, but he has quickly won the admiration of Silicon Valley’s brand names like Twitter CEO Dick Costolo who has said “I really think he is one of the best product thinkers out there right now.”
The reason we bring up the Spiegel email leak again, some 4 months after the fact, is that while the public’s attention when the email was first released focused on his strategy surrounding the growth of Snapchat, there was another far more important aspect to Spiegel’s email. One that, in the aftermath of last night’s Facebook earnings, has proven to be spot on.
Recall that in the latest Facebook earnings reported last night the company posted its slowest growth in quarterly revenue in two years coupled with higher spending on research and development ate into profits. Facebook has warned of heavy investments in 2015 as it steps up efforts to expand a collection of products that include messaging service WhatsApp, photo-sharing service Instagram and virtual reality headset maker Oculus Rift.
In other words, while many focus on Facebook’s top-line and eyeball growth, far more importantly, Facebook’s spending on user acquisition is soaring. As a result, Facebook’s operating expenses rose 83% in the first quarter as R&D costs jumped 133 percent and marketing and sales spending nearly doubled.
This is precisely what Spiegel warned about back in December 2013 in an email to Benchmark Partners’ executive Mitch Lasky, which was leaked as part of the Michael Lynton, a Snapchat director and Sony executive, 32,000 email hack. This was Spiegel’s accurate forecast in December 2013:
Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance – especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users – a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. “If this company attracts just 5% of users that FB has, it will be HUGE” – fuels spend on user acquisition as user growth is tied to values).
But why is this relevant: after all Facebook, at a market cap of $235 billion, is just barely off its all time highs? The answer is because the good times won’t last, especially if yesterday’s jump in user acquisition costs is indicative of a new, secular trend for the site which alleges to have nearly 1.5 billion monthly users. This is what Spiegel thinks will happen then:
When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease – compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough.
More importantly, Spiegel brings up an absolutely critical point for the second tech bubble fueled by social-media stocks: there simply is not enough ad spending dollars in existence to support the gargantuan market caps.
Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.
And finally, linking it all together and confirming that Spiegel is far more mature than his youthful 24 years, is his take on what happens to the tech bubble once the Fed’s Kool-aid ends, and what follows.
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks.
All of this was said back in December 2013 by the person many consider to be at the forefront of the social media bubble. Is it clear now why central banks are literally going all-on to monetize everything and anything around the globe, just to keep said momentum investor bid going? Because without it, and all bets are off, not in our words but in those of Silicon Valley’s very own poster child.
@Amazon.com: The Secrets of the Federal Reserve Price: $14.13
@Amazon.co.uk: The Secrets of the Federal Reserve Price: £15.49
– Eustace Mullins: Secrets Of The Federal Reserve (Video) (Hawaii around the year 1989)
– Eustace Mullins: Secrets of The Federal Reserve (Video) (BC, Canada on August 2000)