MorningWord 11/2/16: It’s over, you got here just in time for the death rattle

by Dan November 2, 2016 9:43 am • FREE ACCESS

I’d love to tell you that my bright-eyed and bushy-tailed 22 year old self had a sense how big this internet thing was going to be big upon my graduation from the University of Pennsylvania in May of 1995. I didn’t. I took a class on the world-wide-web my senior year as a sort of a place holder as I had meet all of my major requirements, and found myself spending months building a webpage that accumulated set lists of Grateful Dead shows that I had attended since high school. This made perfect sense to me at the time cause for some reason the details of those shows had escaped me 🙂 During college I was mostly oblivious to the internet until that class. But beside that, I had little use for it. But others did. Within a mile or so from me on campus at Penn was a 23 year old Elon Musk (a classmate of CC and mine, we don’t personally know him), building, later to become Paypal, and eventually plotting to become a real life Tony Stark.

It was all happening around me, but I wouldn’t really become aware of it until I was an assistant trader at a long short equity hedge fund in 1997 when the guy I worked for asked me to figure out what all these four letter stocks did (not INTC, MSFT, DELL or CSCO, but YHOO, XCIT, AMZN) which moved around in at least a 10% daily range.

That was a wild period in the stock market.

Now let me quickly fast forward to the stock market crash in 2000. It was the result of the all those dotcom stocks crashing back to earth. And the name for the entire period was kind of named in hindsight. The dotcom bubble. But also in obvious hindsight, despite being an investment bubble it was predicated on one of the most dramatic technological advances in the world’s history, and even after the crash it was still in its infancy. The dotcom crash slowed some of the money going into new ideas, but start-up culture quickly adjusted and learned to do more with less during the early 2000’s period of “lean” start-ups. With or without sources of funding it kept on rolling. To quote (paraphrase) Lin-Manuel Miranda in his play Hamilton, “Every action was an act of creation!

Technology investors, who for years had lived by rules like Moore’s Law to help guide business cycles, had no idea how to quantify the potential of these advancements and their disruption on long established industries, or for that matter how to value these grossly overvalued, over-hyped, money losing companies with brash leaders and endless ambitions. Like Hamilton, now one of out most famous founding fathers, there were plenty of internet founders who were certain that “there would be a revolution in this century“, and there was, but for most (save Mark Cuban) their victory would be delayed.

Just to demonstrate what a mania it was, for those who were not around, or focused on financial markets, the Nasdaq Composite doubled from August 1999 to its (then) all time highs made in March of 2000 (we are just above the levels now):

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

To to put that move in context, in April of 2010 the Nasdaq composite had gotten back to 2500 following the Financial Crisis, and it wasn’t until early 2015 that it got back above 5000 (earlier excluding dividends, inflation etc, but you get the point):

From Bloomberg
From Bloomberg

So here this layman’s quick take on what went down into the build up of the dotcom crash. Some really sharp tech and sales peeps got a whiff that personal computers could be used for so much more then word processing and Flight Simulator in the late 1980s/early 1990s and began to think about how consumers, beyond hard-core tech nerds might access the internet and actually do productive stuff. For example, listen to Kara Swisher’s ReCode Decode podcast with Ted Leonsis, essentially a founder of AOL with Steve Case on how they came to be here. They created walled gardens like CompuServe, Prodigy, MSN Network and America Online which offered dial-up access to the internet with web-mail and other proprietary offerings for individuals and businesses.

Then came browsers like Netscape’s Navigator to let internet users find their own way on the web, which lead to portals like Yahoo!, Lycos, Excite, AltaVista, Geocities, Infoseek and AskJeeves assisting in the listing and procurement of generally offline services and web search.

Instant message became a thing after AOL bought ICQ, and Yahoo launched their own messenger.

Email was obviously hot, umm you’ve got mail, Microsoft bought Hotmail, a web-mail pioneer in 1998 for $400 million to take on AOL and play catch up with upstart Yahoo.

Then eCommerce became the rage, with Amazon, eBay, and online travel with Priceline and Expedia making it so we did not have to leave our sofa to buy stuff. Before you knew it, you could print out point to point directions on Mapquest, miss-diagnose that weird looking thing protruding from your big toe on WebMd, research a laser disc player or camcorder on, find a date on who shares your interest in asteroid hurling to earth movies like Armageddon or Deep Impact. You get the point.

Low cost dial-up providers like Earthlink and Juno Online emerged, it was almost too late as demand for broadband became the rage. Companies like @tHome offering broadband service for audio and web streaming from services like Cuban’s or Napster’s filing sharing service, which were nearly impossible on dial-up. And with the promise of broadband came with it fiber optic cables, boosters, modems, radios, routers, switches, amplifiers, inverters, converters etc etc to connect consumers and businesses to internet data centers Before you knew it, every telecom equipment and computer hardware company on the planet was changing its business plan to service the internet.  M&A was massive, and every tech company connected to the internet in some way shape or form saw multiple expansion and traditionally offline companies in almost every other sector wanted in on this action.

And we know how that initial phase ended.  Here we are 21 years from when I became aware of the internet, and 3 companies, Amazon, Google and Facebook are essentially the consumer internet. Three companies with a combined $1.3 trillion in market capitalization, or about 12% of the entire Nasdaq market.  Yeah we still have Ebay, Paypal, Yahoo, Priceline & Expedia, and there were some pretty good efforts at disruption like Netflix and Pandora in Web 2.o, but they seem like they are all about to be gobbled up by either Amazon, Google and Facebook. So Web 3.0, we have augmented reality cat faces on disappearing mobile selfies, 140 character trolling platform and Pokemon Go?? Give me a break, to quote Lester Bangs (played by Philip Seymour Hoffman) in Almost Famous, “it’s over, you got here just in time for the death rattle…“.

If I were a 24 year old equity trading assistant I can’t really come up with the company’s whose stocks are moving around so much, who very well might be on the cusp of some massive technological and economic secular shift for the next two decades. Yeah AI, VR, machine learning, Autonomous driving, flying cars, blockchain. But at this point it seems like the usual suspects will also be at the forefront of these emerging technologies. So for now, keep crowding into the handful of stocks that got you here, and I am not sure it makes sense to hold onto to cash to swap into Uber, SnapChat, AirBnb, Pinterest & Spotify when they come to market, they also feel kind of fully valued relative to their private comps.