From Tom Dyson in Tom’s Confidential: Private companies worth more than $1 billion are now called “unicorns.”
There were 18 unicorns during the tech bubble in 2000. Now, there are 117—with another 50 expected to join the list by the end of 2015.
Aswath Damodaran, a guru in corporate valuations, is sounding the alarm. He believes the market is a victim of the “ladder of pricing”:
Investors and founders are arguing that if “A” is worth “X”
billion, then their own company… must be worth near or above “X.”
Revenues and earnings aren’t mentioned. Instead, investors and founders alike are setting their valuations only by looking at their competitors.
That’s like Blackberry ($5 billion) asking for (and receiving) Apple’s valuation ($800 billion) just because they compete with one another.
Bill Gurley, one of the most renowned private (angel) investors, thinks the bubble will pop in 2015.
And the bubble is bursting…
Twitter reported quarterly earnings April 27. Revenue increased 74%, but fell 6% short of the projected $463 million. Shares dropped 18% the next day. (They’re down 33% since the earnings announcement.)
LinkedIn also dropped 18% the day after disappointing Wall Street with its “weak” guidance on April 30.
Etsy, the handmade goods e-commerce site, went public April 16. Investor excitement pushed shares up 87% on the first day of trading.
Investors piled in… until Etsy disclosed it had lost money, sold counterfeit goods, and faced competition from Amazon.
Its stock has been down 46% since.
Barron’s noted that six of the seven tech stocks that went public from January to May are at least 10% below their first-day closes.
Snapchat should be next on the list…
CEO Evan Spiegel is looking to take the $19 billion “disappearing messaging” app public this year.
Spiegel wants to sell before the pop. He admitted so at a coding conference:
We need to IPO… I think that people are making riskier investments… and there will be a correction.
What does this mean?
Cracks are appearing. They’re little tremors that early investors pay attention to.
When companies are priced for perfection, their stocks will tumble quickly at the first sign of bad news. It’s a classic sign the bubble is ready to burst.
Today, we’ve found the perfect way to profit from this bubble.
Now, this recommendation is not for the faint-hearted. It is the riskiest recommendation we will ever make in Tom’s Confidential.
If it doesn’t work out, we will lose 100%. And there’s a high chance that will happen.
So, with so much inherent risk, why are we making this trade?
The potential returns are huge.
We could triple our money in 18 months. That puts our risk/reward setup at a solid 3-to-1. Translation: We could make $3 for every $1 we risk.
Reeves’ Note: Current Infinity subscribers can click here to access Tom’s recommended portfolio of “overvalued tech” put options. It’s a six-part trade unprecedented in the history of Palm Beach Research Group. Tom believes TC readers will bank a fortune (200% in under 18 months).