Earlier in the fall there seemed to be a little bubble forming in the financial press about the need to label the stock market, or any market for risk assets a “bubble”. Back in early November I opined in this space:
While many readers know that I am tad skeptical as to the reasons why equities are trading where they are, I can’t tell you that living and trading through the dotcom bubble of the late 1990s, or as an active participant in the real estate bubble of the mid 2000s that what we are seeing now by any means resembles the sort of all out reckless speculation of those bubbles past, we merely have pockets of over exuberance among a few sectors (or even a few dozen stocks) that appear to be attracting a disproportionate amount of headlines.
Not a ton has changed in equities since I wrote that on November 4th, aside from TWTR’s widely successful IPO, now up 170% from its offering price, sporting an almost $40 billion market cap, or put another way, about 40x next years expected sales! TWTR should not be a massive warning sign for those bubble watchers though, as there is a certain “scarcity” value being placed on the property, as high quality social media companies appear to be few and far between.
Which brings us to the activity in the IPO market, Per CNN.com:
While it was the biggest year since the technology bubble burst, the IPO market (222 deals) is still a far cry from 2000, when more than 400 companies went public.
This year’s IPO class raised more than $54 billion, compared with nearly $100 billion for the new stocks in 2000. Still, the IPO market has come a long way since the dark days of 2008, when only 31 companies went public in deals that raised a mere $24.5 billion.
So not exactly bubblicious yet, but maybe just maybe the highly anticipated $200 billion valuation of Alibaba expected to IPO in 2014 could mark a near term top in new issuance?
So what would the last straw really be??? Most likely silly M&A. Back in January 2000, when sentiment could not have been better towards the prospects of any company transacting on the world wide web, Time Warner, a bellwether in traditional media made a $160 billion merger agreement with America Online (AOL). For the kids out there, Google America Online, it was an internet service provider that also had a really cool thing called a web portal and an instant message service that was “yet to be monetized”. Make no mistake about it, that was the top at least from a sentiment standpoint, despite tech stocks having one last widow-maker rally before topping out in mid March, but that was the day most market historians will point to as the day the tech bubble was pricked.
And then there was MSFT’s failed bid for YHOO in early 2008 (about $45 billion), which would have marked the second largest internet deal since AOL/TWX, coming just months before the financial world as we know about was about to come to an end. There is a certain sense of irony that YHOO shares now have a market cap of more than $40 billion for the first time in more than 7 years, largely based on a $1 billion investment YHOO founder and then CEO Jerry Yang made in Alibaba, which is now worth most of YHOO’s current market cap. The same Jerry Yang that turned down the MSFT bid!
SO I guess the moral of the story, it’s not sky high public market valuations of high-flying tech stocks that mark a bubble, or the valuations, or quantities of unprofitable hot tech IPOs that come to market. It is usually some combination of such activity over a period of time that defies logic, but then topped off with the mother of all ridiculous M&A activity! This could be coming to a theater near you in 2014. Your guesses are as good as mine, will it be MSFT for YHOO so that Marisa Mayer can be the new MSFT CEO? Or will AAPL make a knock out bid for TWTR or a group of smaller private social media/messaging companies like SnapChat and WhatsApp? Will AMZN buy Netflix or Pandora and abandon their build vs buy history? If any of these “pie in the sky guesses” were to happen, what sort of unintended consequences would it have for the likes of GOOG and FB. Again who knows, but my sense would be that any sort of M&A frenzy by the group listed above would most certainly mark the beginning of the end of this leg of the equity bull market, just a matter of when, not if!