MorningWord 10/6/16: Fear and Loathing in San Francisco

by Dan October 6, 2016 9:50 am • FREE ACCESS

Strange memories on this nervous night in San Francisco. The kind of peak that never comes again?

If you listen very closely, you might just be able to hear it… the sound of universal optimism around the dawn of a new age of technology. No matter which way you go you could come to a place where people were just as high and wild as you were. No doubt at all about that. . . .  There is madness in any direction, at any hour.

Like the 170,000 SaaS fanboys that descended on San Francisco’s Moscone Center for SalesForce.com’s (CRM) Dreamforce conference, the launch of AI for the masses (both enterprise and consumers), a supposed bidding war for money losing no growth Twitter, Facebook (FB) launching Marketplace for their users to sell guns, drugs and baby hedgehogs (whoops), and daily new all time highs in Amazon.com (AMZN), with the stock’s market cap crossing $400 billion and some calling for it to be the first $1 trillion company in a matter of years. I tweeted this yesterday:

I am not calling a top, I have tried that unsuccessfully on a few occasions. I’m just saying that nobody really understands at the time—and which never explain, in retrospect, what actually happened.

While the bubbling is still inflating, I thought why not add to the enthusiasm yesterday, taking a look at EBAY (Partying Like it’s 1999) and why FB’s launch of competitor Marketplace might be a better fit for Alphabet (GOOGL) than TWTR (rumored to be doing due diligence):

in the near term, given the M&A environment, EBAY could be in play as possibly Alphabet (GOOGL), Alibaba (BABA), Apple (AAPL) or Amazon.com (AMZN) (basically any mega-cap tech stock that starts with an A) think about the threat FB could pose offering its 1.7 billion users one more reason not to search on Google or purchase on Amazon.com. In many ways, given the millions of searches that go on daily on EBAY, the embedded purchasing options, and the consumer data amassed, EBAY may fit the sort of takeover scenario that made LinkedIn (LNKD) so attractive to Microsoft (MSFT) and possibly Twitter (TWTR) attractive to GOOGL or Salesforce.com (CRM). With one big BUT, EBAY has a very profitable business, that may be at an inflection point not seen in years, while LNKD & TWTR have chunky earnings losses on a GAAP basis.

Obviously the companies massive initiative in structured data, and wait for it…

Back in mid July, EBAY CTO Steve Fisher authored a blog post on the site titled “Replatforming eBay: How We Are Delivering the Shopping Destination of Choice“, here is the crux, but you know the drill, there will be large artificial intelligence/machine learning/big data elements:

“One of the biggest opportunities we have is to organize, catalogue, curate, and present our vast inventory in ways that enable every person who shops on eBay to find their version of perfect, no matter what it is. That’s why we have embarked on an ambitious, multi-year evolution of our shopping platform at eBay that aims to deliver relevant, persistent and personalized experiences for consumers.”

But maybe the biggest reason, before Marketplace can gain any traction with their 1.7 billion users is also to ward off the other $400 billion pound gorilla in the room, AMZN, per Bloomberg on Sept 27th:

More than half of U.S. online consumers begin their product searches on Amazon.com Inc.’s website or mobile app, a survey found.

Fifty-five percent of those surveyed go to Amazon first when searching for products, an increase from 44 percent a year earlier

It’s been my view that Twitter would be valuable to GOOGL because they are a growing destination for real time search, and as the company likes to say they are the place for LIVE. In my opinion, this is a blindspot for GOOGL despite the deal they struck last year to include tweets in Google searches. Which leads me back to EBAY, back in late July, after EBAY’s Q2 beat and raise, Citi analyst Mark May suggested the company could be a target of GOOGL, per Barron’s:

We see the recent turnaround in the business as a positive for the prospects of a potential acquisition since the management team’s ability to reaccelerate growth reduces the risk of investors catching a ‘falling knife’. Though an acquisition of this size would necessitate a long period of due diligence, eBay currently sits in a ‘sweet spot’ for an acquisition in our view. The fundamentals of the story are now improving with dry powder for upside the next few quarters, but the stock has yet to get ahead of its skis from a valuation perspective. Therefore if there was interest in eBay, a buyer would likely want to get ahead of a potential beat and raise cycle. We believe a wide range of companies could potential have an interest in acquiring eBay, including foreign eCommerce companies with an interest in expanding their global footprint (e.g., Alibaba), digital media companies interested in adding transactional capabilities to their media properties (e.g., Alphabet), incumbents in both media and retail looking to strengthen their digital footprint (e.g., Wal-Mart), and private equity companies, among others.

But this morning’s 15% decline in Twitter (from a 2016 high) following media reports that CRM, DIS & GOOGL may not bid for the company is exhibit A why chasing take-over rumors is a dangerous game.  As I described in our note yesterday, there a few comparisons to be made between TWTR and EBAY has targets for a company like GOOGL, but a few big ones are valuation, profits and expected growth.

Make no mistake, there is a certain buzz in tech (both public and private markets) not heard (like this) in a while. Does it mean we are about to see a crash in valuations, not exactly, the same was said in late 1999 in the Nasdaq composite, prior to the index doubling in 5 months to its March 2000 high:

Nasdaq Comp 1999 to April 2000 from Bloomberg
Nasdaq Comp 1999 to April 2000 from Bloomberg

I am certainly not suggesting that is going to happen, but the measured move of the last 2 year’s consolidation is about 1000 points or, 20% on a breakout:

Nasdaq Composite 5 year from Bloomberg
Nasdaq Composite 5 year from Bloomberg

I have no idea whether it breaks out or not, but I suspect the upside downside risk is lose 2 make 1, remembering the index is up 16% since the end of July, and up 26% from its February lows, largely driven by the gains of a handful of stocks, all listed above.

But last night, you could go up on a steep hill and look West, and with the right kind of eyes you can almost see the high-water mark—that place where the wave finally breaks and rolls back.