Tech Bubble Won't Burst In 2015. 2016?
The bubble question.
It’s hard not to think about it as we ease into 2015, given that signs of froth have been building in tech since ever since the end of 2010, when acquisition prices and private company valuations started to soar. After four years of steep gains - of companies such as Salesforce.com hovering near all-time highs without ever turning a profit, of the Nasdaq creeping up on 5000 and at least one private company nearing a $25 billion (or more) valuation - shouldn’t something give?
All cycles being equal, of course we’ll see prices come down, eventually. But I don’t think it will happen for a few more quarters yet.
I’ve watched two crashes now - the end of the dotcom boom in 2000 and the credit collapse of 2008 - and one thing that was true of both is that a chorus of observers and analysts and Smart Money spent years saying that the tech sector was overinflated before anything actually burst.
In fact, the knowledge that valuations were hitting unsustainable highs seemed only to fuel the frenzy for venture firms, shareholders and banks to do deals at ever higher prices. That, in turn, kept those bubbles inflating well beyond the boundaries of rational pricing and investing.
As ex-Citigroup chief executive officer Chuck Prince said during the last go-round, offering all of us a permanent memento of a certain type of CEO, someone trapped by the forces of irrational exuberance, someone less a corporate steward and more a suitor at a cotillion: “When the music stops… things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” Or as Daniel Cohen, a venture investor recently told me, “We know that the question is, 'When does the cycle turn?' But until then there’s lots of money to be made.”
It’s clear that there’s money to be made in Silicon Valley right now, and no one wants the boom to end.
The effervescence that dominated the final few years of both of the previous market booms was largely due to low interest rates, which, perversely, pushed piles of cash from around the globe into asset classes yielding the best return. The lower the rates, the loftier the inflation. That’s also where we find ourselves today.
Tanya Beder, a former hedge fund manager and founder of the asset advisory firm SBCC, describes her outlook for 2015: “Right now the global economy is driven by policy, not fundamentals. And that has made the U.S. the least worst place to invest.” The U.S. recently posted higher-than-expected GDP growth at a time when China’s growth is slowing, the Euro zone is struggling and Japan has dipped into a recession. Thanks to low interest rates, investments with some of the highest returns include private companies and tech, along with risky fare like junk bonds.
Take a short drive up and down the venture enclave of Sand Hill Road in Menlo Park and you’ll experience the global chase for higher returns first hand. VC firms are flush with cash, thanks in part to the equities bull market. Real estate prices are soaring. (Beder says she pays twice as much for her Sand Hill digs as she did for prime Manhattan real estate.) Guys from private equity firms and sovereign wealth funds are getting more active in the venture world. Lawyers are working to help startup employees cash out and sell their equity to private buyers. It's all a lovely, lucrative, frothy stir of money, ideas, and ambition.
The economists at Goldman Sachs seem to believe that Beder’s “best of the worst” scenario for the U.S. will last at least another year. They predicted in a recent note that the Federal Reserve won’t raise interest rates until next September, and until then the U.S. recovery will far outpace Europe's efforts to bounce back. According to economic forecasts housed on the Bloomberg terminal, the U.S. will have 3 percent GDP growth in 2015 and a 5 percent unemployment rate, compared with GDP growth of 1.2 percent and an unemployment rate of 11.4 percent for the Euro zone.
Goldman also predicts that oil prices will stay low and act as a stimulus for consumer spending. The oil trend should also bring down core inflation numbers, give central banks around the world room to keep rates low and force investors to continue picking off higher-risk assets in search of rich returns.
I think we have another several quarters of dramatic growth left for Silicon Valley and the broader world of tech stocks. Still, the next bubbly stretch will be dangerous for acquirers and investors, and not just because they'll be buying at lofty prices. It’s because if it winds up being the tail end of the cycle, those who arrived late to the dance may find themselves in trouble when the music stops and they discover everyone else has left the ball already.
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Timothy L. O'Brien at email@example.com