Silicon Valley may tighten its grip on the viewing device of your choice thanks to its eponymous show on HBO. But some market watchers are saying the drama may be a contrarian indicator and that the high tide for tech is about to ebb just as Hollywood premieres mainstream TV treatment of arriviste, altruistic billionaire -- and wannabe -- tech entrepreneurs out to change the world.
“It’s a ‘get ready to sell’ signal,” warns Paul Macrae Montgomery, CEO of Montgomery Capital and the man credited with creating the Magazine Cover Indicator -- which posits that when a mainstream publication such as Time Magazine puts a company or market direction thesis on its cover, the trend is about to end.
Examples of the indicator include the infamous “Death of Equities” cover that graced Business Week in 1979, not long before the bull run of ’82-2000 began. Amazon.com’s (AMZN) CEO Jeff Bezos was Time’s Man of the Year in 1999, and the stock tumbled to life support status over the next year as the dot com bubble burst, and in all fairness, before it came roaring back over the next decade. Some enterprising finance professors even found a correlation . (Hat tip to Minyanville for uncovering this research.)
But is there such a thing as a TV Top Indicator? Perhaps Streaming Video Alert is more apropos these days?
“No doubt we’ve seen television shows and movies as great contrarian indicators over the years,” says Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “’Silicon Valley’ could be a major warning…This of course doesn’t mean there has to be a top immediately, but considering how poorly the Nasdaq has performed the past month -- one has to wonder.”
Montgomery, who publishes the “Universal Economics” newsletter, says the signposts may be changing as tactile magazine covers lose their sway in the digital age. “I think it was Hercule Poirot who said, ‘The methods of detection change (from “Time” magazine covers to websites and TV), but the crimes remain the same. I’d be worried about Venture Capital with (current TV shows) “The Profit” (on CNBC) and “Shark Tank” (NBC & CNBC). It’s a real phenomenon.”
It’s not the additional attention being lavished on the dealmakers, dreamers and daring innovators that has Montgomery, Detrick and others concerned, it’s the underlying reason so many people are now paying attention: frothy valuations and large sums being offered for nascent firms with great promise but a dearth of profits or even revenue streams.
Venture capital firms and startups are currently finding the most receptive market for deals since the dot com peak. U.S. technology sector mergers and acquisition volume in the first quarter of this year totaled $55.23 billion. According to Dealogic data, that’s the most in a single quarter since the third quarter of 2000, and the highest total to start a calendar year since the heady days when AOL (AOL) announced it was buying Time Warner in early 2000.
The current run rate would easily put 2014 on pace for the most tech M&A activity in dollar terms since the Y2K bubble burst. This doesn’t necessarily mean there’s currently a bubble (deal values aren’t near ’06 levels much less ’00), or that valuations and prices won’t go higher. After all, the Federal Reserve’s zero interest rate policies have encouraged speculative investing, and many unprofitable firms later become juggernauts or contribute handsomely to an acquirer’s bottom line.
But recent deals such as Google’s (GOOG) $3.2 billion buy of Nest Labs and Facebook’s (FB) purchases of WhatsApp for $19 billion and Oculus VR for $2 billion have certainly given some industry insiders reason to pause.
One Silicon Valley tech start-up CEO, who didn’t want to be named, says, “The fat has to be trimmed. There has to be a correction. When a billion dollars and multibillions have become the new million dollars,” adding, “Technology has made it so easy to do a startup, there’s a glut in [Silicon] Valley of all these startups who have gone nowhere and can’t get follow-on funding.”
US Technology Sector M&A
Quarterly Deal Value ($billions)
US Technology Sector M&A
Quarterly Deal Value ($billions)
Perhaps because tech takeovers have become so commonplace, there are actually fewer early stage firms coming to market with an initial public offering of stock. University of Florida Professor Jay Ritter, an IPO expert, notes only two of the 15 tech IPOs in the first quarter were profitable. That’s 13% if you’re scoring at home and worse than the full-year record lows of 14% posted in the dot com bubble years of 1999 and 2000. Perhaps even more troubling for investors, zero of 26 biotech firms that went public were profitable.
Ritter notes this “modest” amount of tech IPOs comes amid the backdrop of the IPO market’s fastest start to a year since, once again, 2000. The professor says tech giants such as Apple, Facebook, Google, and Microsoft are “paying top dollar” for VC portfolio companies, so there aren’t as many young tech companies going public as in the 1990s. Ritter says the tech IPOs do sport high valuations, but “are generally more mature than was the case in the internet bubble, and so there is less risk of total failure.”
Casual viewers and many current tech titans may have easily missed or forgotten the last time mainstream television took a stab at scripted Wall Street drama -- it presaged real life tragedy for dot com darlings and many day traders alike. TNT’s “Bull” had a short run that began in August 2000, while “The $treet” debuted on Fox a few weeks later and went bust in fewer episodes.
The internet bubble had burst and the returns were getting worse for the major stock averages as well as the Nielsen ratings. Viewers didn’t want to watch fictional stock market angst as their own portfolios took a beating.
Only time will tell if “Silicon Valley” the show will be as big of a hit as its products. Kevin Chou, founder and CEO of mobile gaming company Kabam, has a more romantic vision of a modern American Dream than the one teased in the show’s online trailers.
Chou, the son of immigrants, says, “Silicon Valley is the unique place in the world where entrepreneurs’ dreams are either made or shattered with astounding frequency…the heart of Silicon Valley is the joy of bringing products and services to market that make peoples’ lives better and make a big, positive impact on the world.”
Damien Patton is founder and CEO of Banjo, a social media service that organizes posts, videos, and photos by location in real time. Patton is skeptical of the show and says real life at Banjo’s Redwood City, Calif., offices and others in the area are not camera ready. “I don’t think we’re that interesting, odd characters from different walks of life making amazing technology for the world…White-boarding is not sexy and therefore won’t sell. A reality show would see us white-boarding ideas, coding, and getting consumer feedback.”
Others in the Bay Area are curious and plan to tune in. “I have generally heard good things about it, so I’m looking forward to watching it,” says Sam Shank, co-founder and CEO of San Francisco-based mobile travel app Hotel Tonight.
Angel investor Barrett Cohn has been in the San Francisco Bay Area for almost two decades and is intrigued by the fictionalization and escapism that Mike Judge’s show may offer, even for insiders. “I think there’s a growing popularization and fascination with innovation and wealth being created out here and that’s why a show like this can exist. I’ll watch it; I think it will be interesting and fun. I’ll watch it like I watch “Girls”-- for entertainment value and nothing more.”
Even if tech and social media stocks flounder, America’s hunger for gadgets and technology is seemingly insatiable at the moment. That’s the zeitgeist the show’s producers and creators are trying to tap into. They are no doubt hoping for better market timing, and numbers, than “Bull” and “The $treet” enjoyed. But as the old axiom states, hope is not a position in the market.
After the big run up by social media and tech stocks over the past few years, Detrick, the Schaeffer’s strategist, sees more opportunity in a staid sector featured prominently in another HBO show bowing this weekend, “Game of Thrones”: “We like steel. It’s not a well-liked sector, yet it has been doing very well over the past 12 months. I wouldn’t be shocked if money left the ‘hot’ areas like tech and social media and made its way to the more boring areas like steel.”
In short, Detrick is cautious on “Silicon Valley” and going long Valyrian Steel.