At the height of every boom there are stories about the mighty…the ones who have ridden the wave to riches.
The biggest wave of all in recent years has been in the technology sector.
The FAANGs — Facebook, Amazon, Apple, Netflix, Google — surfed an ocean of liquidity…courtesy of the Fed’s ‘fast and loose’ monetary policy.
Valuations soared on the collective (and mistaken) belief that ‘trees would grow, not only to, but beyond the sky’.
In recent months, the share prices of the FAANGs have fallen anywhere from 20%–40%.
Reality might just be starting to sink in.
While the FAANGs capture most of the headlines, there are a host of other tech companies with valuations not even remotely supported by earnings…or in many cases, a total lack of earnings.
But, minor details like earnings count for little in the midst of a boom.
True believers buy into the CEO’s vision of ‘We’re investing for growth, profits come later’.
Those who don’t buy into the vision are labelled cynics and naysayers.
And while the mood remains upbeat and liquidity is both abundant and cheap, the CEO’s ‘growth at any price’ vision can be indulged and encouraged.
The mighty are those who have defied the naysayers…creating companies with ‘telephone number’ valuations from business models that bleed money.
Investors ignore the bird in the hand, because they believe there’s a whole flock in the bush.
Masayoshi Son’s rise to success
One of the investors who has successfully ridden this wave is Masayoshi Son, CEO of SoftBank Group Corporation.
In 2000, Softbank invested US$20 million into a relatively unknown Chinese internet business called Alibaba. When Alibaba listed in 2014, SoftBank’s stake was worth US$60 billion.
That made people sit up and take notice.
Masayoshi Son was suddenly ‘the man’…he had no trouble in raising US$100 billion to invest in the tech sector’s ‘up and comers’.
But that was just the start.
According to Bloomberg on 27 September 2018 (emphasis is mine):
‘In 2016, SoftBank Group Corp. Chief Executive Officer Masayoshi Son shook up Sand Hill Road [Silicon Valley] when he announced he was raising a $100 billion fund to make investments in fast-growing technology companies. According to Bloomberg Businessweek, Son will eventually go even bigger. He plans to raise $100 billion for a new fund every few years, investing about $50 billion a year in startups.
‘That arguably gives the Tokyo-based Son, 61, more power in Silicon Valley than any venture capitalist—and has turned his nine managing partners, many of them plucked from the world of banking, into tech kingmakers.’
Masayoshi Son, states — in a matter of fact sort of way — that he plans to raise US$100 billion every few years.
Bet you he doesn’t.
These terms tend to be associated with the height of a boom…
‘Go even bigger.’
When the bubble bursts and the tech sector is decimated, finding investors with the appetite to pony-up US$100 billion is going to be as difficult as it is to find a tech start-up that’s making a profit today.
Masayoshi Son deserves credit for putting himself in the right place.
The real reason behind the tech sector’s success
However, much of his, and the tech sector’s ‘success’ is due to the US Federal Reserve.
If the Fed had not ‘sloshed’ trillions of dollars around in the system, there’s no way the money would have been available to bid up prices to these patently ridiculous levels.
And that’s the problem when you enjoy success after success after success, you start to think you have the Midas touch…believing your own press.
When in fact you were a beneficiary of a unique set of circumstances that aligned to create your good fortune.
One of SoftBank’s investments is in the shared office provider, WeWork.
This is from an article published in The Financial Times on 14 November 2018 (emphasis is mine):
‘WeWork has secured an additional $3bn of funding from SoftBank at a $42bn valuation even as the flexible office provider’s losses ballooned to $2bn on an annual basis.
‘SoftBank will inject the funding next year in exchange for a warrant enabling it to buy new WeWork shares by the end of September 2019, at a price that will lift the group’s valuation from the $20bn figure reached in its last equity funding round [August 2017].
‘The fresh funding came as privately owned WeWork said its losses in the nine months to September had nearly quadrupled from a year earlier to $1.2bn… Revenues in the third quarter doubled from $241.1m to $482.3m, bringing total revenues for 12 months to September to $1.5bn, WeWork said.
‘Michael Gross, vice-chairman, insisted that the company would continue investing to expand, despite the widening losses. “Our view is that there is tremendous wind at our back — we are the only serious global player out there,” he said.’
Tremendous wind at our back…hmm.
I wonder if they realise that tailwinds can suddenly become headwinds?
WeWork loses US$1.2 billion from revenue of US$1.5 billion, yet the business jumps in value from US$20 billion to US$42 billion. That’s not a tailwind…that’s hot air.
Just to touch base with reality:
‘…publicly-traded commercial real estate services firm CBRE Group, Inc., which was founded in 1906 and generated $19.4 billion in revenue and $1.1 billion in adjusted net income over the 12-months ended Sept. 30, sports a market capitalization of $14.5 billion.’
Almost Daily Grants
CBRE, with a profit of US$1.1 billion, is trading at one-third the value of loss-making WeWork.
Makes no sense to me…but hey, these are the final days of a boom and nothing makes sense.
As mentioned earlier, SoftBank was an early investor in Alibaba.
On paper — and that’s a big difference to money in the bank — it’s been a real winner.
However, since June 2018, Alibaba shares have fallen around 30%.
In The Gowdie Letter published on 24 August 2018, I wrote:
The Chinese e-tailer listed on the US share market in September 2014.
Since making its debut, Alibaba’s share price has almost doubled.
But when you read this report from WolfStreet.com it makes you wonder if investors actually know what they have put their hard-earned into.
It’s a detail laden article, so for those wanting the bottom line, here’s an extract…
‘Based on the value of “real” retail GMV [Gross Merchandise Volume], the market cap of Alibaba should be about the same as Target (TGT) ($ 40 Billion) rather than $470 Billion, the company’s current market cap. I smell a disconnect.‘
If the analyst’s assessment is even somewhat accurate, then Alibaba is worth less than 10 percent of its current market value…in other words, when the world returns to normal, Alibaba shares could fall 90% or more in price.
The accounting ‘smoke and mirrors’ of Alibaba’s SEC filing, led the writer to conclude…
‘This financial cancer is everywhere. Western markets are screwed. The outcome is certain and the party is over. At some point in the indeterminable future, the world will be tasked with cleaning up the mess.’
The report contains a bit of jargon and cynical commentary, but if you’re into that reporting, then it’s well worth the read.
This in-depth background information is crucial to successful investing.
It teaches you that, if you don’t know enough about what you’re investing in, then err on the side of caution…don’t invest.
According to the detailed analysis published in WolfStreet.com, the recent decline in Alibaba’s share price is not just some ‘froth being blown off the top’. This could be the start of some common sense returning to market valuations.
When this bubble bursts, I expect SoftBank to be one of the mighty to fall from its lofty perch.
And when that happens, it’ll be those of us who have fallen behind during this period of grand delusion, who will become the mighty.
We’ll be mighty glad we didn’t believe the hype and stayed in cash…because it’ll be those with cash who’ll become the real kingmakers.
Editor, The Gowdie Letter
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