How can a company that is going to generate $2,000,000,000 in negative free cash flow in 2017 be worth 70 billion dollars? Netflix has soared in popularity in recent years, but so have their financial losses. Just like during the original tech bubble, investors are ignoring basic fundamentals and are greatly rewarding firms that are bleeding giant mountains of cash year after year just because they are trendy “tech companies”. But somewhere along the line you actually have to quit losing money if you are going to survive. Just ask tech bubble 1.0 victims Pets.com, Webvan and Etoys.com. The investors that poured enormous amounts of money into those companies ended up losing everything, and similar tragedies will play out as tech bubble 2.0 bursts.
So far in 2017, the S&P 500 is up about 8 percent, but FANG stocks (Facebook, Amazon, Netflix and Google) are up a whopping 30 percent.
But at least Facebook, Amazon and Google are making money.
Netflix is not.
So why in the world has the stock shot up by more than 30 percent so far this year? It just doesn’t make any sense at all. According to CNBC, during the first quarter Netflix had $423 million in negative free cash flow, and for the entire year it is being projected that it will have $2 billion in negative free cash flow…
The California-based company is now dumping cash into original content to maintain its dominance over its growing field of rivals. The company’s had $423 million negative free cash flow during the quarter, wider than the $261 million negative free cash flow a year ago. Netflix expects to have $2 billion in negative free cash flow this year.
The bleeding of cash at Netflix only seems to be accelerating. The number for the first quarter of 2017 was 62 percent worse than the number for the first quarter of 2016, and it was more than twice as bad as the number for the first quarter of 2015.
It is hard to imagine that Netflix will ever be more popular than it is right now.
So if Netflix is not making a profit at this point, when will it ever make a profit?
Similar things could be said about Twitter. This is a company that has never made a yearly profit and that is actually starting to see revenues decline. But somehow the stock just continues to go up. Since the last time I wrote about Twitter, the market cap has shot up another 1.5 billion dollars.
At this point, the market values Twitter at 13 billion dollars, but in the entire history of the company it has actually lost 2 billion dollars.
What we are witnessing is a modern day version of “tulip mania”, and at some point this irrational euphoria will come to a sudden end. In fact, there are already some signs that tech bubble 2.0 may be in a significant amount of trouble. The following is an excerpt from a Bloomberg article entitled “Investors Go All-In on Tech Giants”…
The tech-powered rally has catapulted the sector to a price-to-earnings ratio of 24.4, or 41 percent above the 10-year average. But as Google and Amazon stretch to nearly $1,000 a share, not everyone is comfortable with the valuations. Investors pulled more than $716 million from the most popular technology exchange-traded fund last week — the $17.4 billion Technology Select Sector SPDR Fund, or XLK — its largest weekly outflow in over a year, data compiled by Bloomberg show.
“Most everybody remembers 2000, so they might be getting a little nervous with this development,” said Maley. “I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits.’”
All over the financial world, prominent voices are warning that the enormous financial bubbles that we see all around us are not sustainable and that a major crisis is heading our way. I wrote about some of these voices yesterday, and today we can add Paul Singer to the list…
Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like…), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.
When the financial markets collapse, Donald Trump will likely get most of the blame.
But Donald Trump did not create the stock market bubble, and he will not be responsible for ending it either.
Since the Federal Reserve was created in 1913, we have seen this same story play out over and over again. There have been 18 distinct recessions or depressions since the Fed was established, and the more the Fed interferes in the marketplace the larger the booms and busts tend to be.
And it could be argued that this time around the Fed has manipulated financial markets more than ever before. Interest rates were pushed as low as possible and trillions of dollars were pumped into the financial system during the Fed’s quantitative easing programs. Of course those actions were going to create a huge bubble, and of course that bubble is going to inevitably burst.
Unfortunately, this is not just a game. Real people with real hopes and real dreams are going to be absolutely devastated. Millions of Americans that were carefully saving for retirement are going to be financially crippled, and pension funds all over the nation are going to be wiped out.
I don’t know why we can’t seem to learn from history. And I am not talking about events that happened decades ago. The build up to this coming crisis is so similar to what we witnessed just before the crashes of 2000 and 2008, but we just keep getting fooled over and over again.
But once things fall apart this time, I think that the American people will finally be fed up. I think that they will be sick and tired of an unelected, unaccountable central bank that creates endless booms and busts, and I think that they will finally be ready to push Congress to shut the Federal Reserve down for good.
Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
To me, looking at profitability is even more important than looking at sales.
Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable.
In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars.
But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible?
How can a company that has never made a single penny be worth more than 11 billion dollars?
Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen?
And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter…
Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent.
Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier.
The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle…
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix.
Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction.
There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars…
Netflix might be my favorite example.
The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.
Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.
Netflix just keeps losing more and more money.
But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company.
I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all.
Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars.
Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely.
Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks.
In the end, we will see who was right and who was wrong.
Do you remember how much stocks went down when the first dot-com bubble burst? Well, it is happening again, and tech stocks are already down more than half a trillion dollars since the middle of 2015. On Friday, the tech-heavy Nasdaq dropped to its lowest level in more than 15 months, and it has now fallen more than 16 percent from the peak of the market. But of course some of the biggest names have fallen much more than that. Netflix is down 37 percent, Yahoo is down 39 percent, LinkedIn is down 60 percent, and Twitter is down more than 70 percent. If you go back through my previous articles, you will find that I specifically warned about Twitter again and again. Irrational financial bubbles like this always burst eventually, and many investors that got in at the very top are now losing extraordinary amounts of money.
On Friday, tech stocks got absolutely slammed as the bursting of dot-com bubble 2.0 accelerated once again. The following is how CNBC summarized the carnage…
The Nasdaq composite fell 3.25 percent, as Apple and the iShares Nasdaq Biotechnology ETF (IBB) dropped 2.67 percent and 3.19 percent, respectively.
Also weighing on the index were Amazon and Facebook, which closed down 6.36 percent and 5.81 percent, respectively.
LinkedIn shares also tanked 43.63 percent after posting weak guidance on their quarterly results.
Overall, LinkedIn is now down a total of 60 percent from the peak of the market. But they are far from the only ones that have already seen their bubble burst.
Many of the biggest names in the tech world have gotten mercilessly hammered over the past six months of so. Just look at some of the famous brands that have already lost between 20 and 40 percent of their market caps…
Yahoo (YHOO) shares are off 39%, and Netflix (NFLX), the best-performing stock in the S&P 500 last year, is now off by 37% from its 52-week high.
Likewise, Priceline.com (PCLN) is off 31% and eBay (EBAY), 22%.
But there are other very big tech companies that have seen stock collapses that completely dwarf those numbers. Here are some more absolutely stunning statistics from USA Today…
Twitter and Groupon are the biggest dogs of this boom, both off 70% from 52-week highs and well below their IPO prices.
FitBit shares have collapsed 70%, while Yelp’s valuation has shrunk by two-thirds.
Box, which has the distinction of posting quarterly net losses in excess of revenue, is down by half.
Match.com, the holding company for dating sites owned by parent Interactive Corp. that went public late last year, is down 39% from its high.
When your stock loses 70 percent of its value, that is a complete and utter collapse.
In the past, I have specifically singled out Twitter, Yelp and LinkedIn as tech stocks that were irrationally priced.
Hopefully people listened to those warnings and got out while the getting was good.
At the top of this article, I mentioned that tech stocks have already fallen in value by more than 500 billion dollars. The financial crisis that began in the middle of last year is now greatly accelerating, and Wall Street is starting to panic.
As stocks crash, many hedge funds are being absolutely pummeled. The following are just a few of the high profile names that are experiencing massive losses right now…
Some of the biggest names to get trounced include:
►Pershing Square Capital Management, the publicly traded investment vehicle of billionaire hedgie Bill Ackman, fell 11% last month following a 20% decline last year, data from the web site shows.
►Larry Robbins’ Glenview Capital, famous for picking stocks that could benefit from Obamacare, dropped 13.65% in January following a decline of 18% last year, according to data from HSBC’s Hedge Weekly report, a copy of which was obtained by USA TODAY.
►Marcato International, a well-known activist fund run by Ackman protege Mick McGuire, fell 12.1% last month following a 9% loss last year, according to HSBC.
When you lose more than 10 percent of your money in a single month, that is not good.
And if I am right, this is just the beginning of our troubles.
And of course I am far from the only one warning that big problems are on the horizon. In fact, analysts at Citigroup just made international headlines by warning that the global economy was now trapped in a “death spiral”…
Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.
“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.
“Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”
Signs of a significant economic downturn are all around us, and so many of the exact same patterns that played out during the last two stock market crashes are happening again, and yet most people continue to refuse to acknowledge what is taking place.
If you are waiting for this new dot-com bubble to crash, you can stop waiting, because it has already happened.
When your stock falls by 50, 60 or 70 percent, the game is already over.
But just like 2001 and 2008, many people out there will end up being paralyzed by indecision. Once again the mainstream media is insisting that there is no reason for panic and that everything will be just fine, and once again millions upon millions of ordinary Americans will be wiped out as the financial markets implode.
This is now the third time this has happened since the turn of the century.
How clueless have we become? The exact same thing keeps happening to us over and over and yet we still don’t get it.
Only this time around there isn’t going to be any sort of a “recovery” afterwards.
This is essentially our “third strike”, and the years ahead are going to be extremely bitter and painful for most people.
But if you want to believe that one of these politicians is going to come along and save America, you go ahead and keep on believing that.
Most people believe what they want to believe, and the capacity that many Americans have demonstrated for self-delusion is absolutely remarkable.
Shouldn’t Internet companies actually “make a profit” at some point before being considered worth billions of dollars? A lot of investors laugh when they look back at the foolishness of the “Dotcom bubble” of the late 1990s, but the tech bubble that is inflating right in front of our eyes today is actually far worse. For example, what would you say if I told you that a seven-year-old company that has a long history of not being profitable and that actually lost 64 million dollars last quarter is worth more than 13 billion dollars? You would probably say that I was insane, but the company that I have just described is Twitter and Wall Street is going crazy for it right now. Please don’t get me wrong – I actually love Twitter. On my Twitter account I have sent out thousands of “tweets”. Twitter is a lot of fun, and it has had a huge impact on the entire planet. But is it worth 13 billion dollars? Of course not.
When it comes to the Internet, what is hot today will probably not be hot tomorrow.
Do you remember MySpace?
At one time, MySpace was considered to be the undisputed king of social media. But then something better came along (Facebook) and killed it.
It is important to keep in mind that Facebook did not even exist ten years ago. Yes, almost everybody is using it today, but will everybody still be using it a decade from now?
But the way that the financial markets are valuing these firms can only be justified if they are going to make absolutely massive profits for many decades to come.
Will Twitter eventually make a little bit of money?
Probably, as long as they get their act together.
In fact, Twitter should be making significant amounts of money right now if it was being run correctly.
But will Twitter ever make 13 billion dollars?
No, that simply is not going to happen. But that is what Wall Street says that Twitter is worth.
The utter foolishness that we are witnessing on Wall Street right now is so similar to what we saw back in the late 1990s. It is almost as if we have learned nothing from our past mistakes.
These days I keep having flashbacks of the Pets.com sock puppet. For those too young to remember, the following is a brief summary from Investopedia about what happened to Pets.com…
It’s impossible to think of the first Internet era without thinking of the Pets.com sock puppet. He was everywhere and was nearly as well-known as the Geico gecko is today.
That familiarity, in part, persuaded many investors to lay down money in the company’s February 2000 IPO (which was backed by Amazon.com). Pets.com raised $82.5 million – but nine months later it folded, due to major recurring losses. Part of the reason for that was aggressive advertising, but the company also lost money on virtually every item it sold. In the third quarter of 2000, Pets.com reported negative gross margins of $277,000. (The second quarter had seen a $1.7 million margin loss.) That same quarter (its last full quarter as an operating entity), the company lost $21.7 million on $9.4 million in revenue.
As for the puppet, he went on to shill for BarNone, which helps people with bad credit histories get car loans. He’s still there today, front and center on that website.
Everyone loves to laugh at the poor little sock puppet, but the truth is that the tech bubble that is inflating right now is far worse than the Dotcom bubble of the late 1990s. The following are 14 facts about the current tech bubble that will blow your mind…
#1 In just a few days, the Twitter IPO is expected to raise close to 2 billion dollars even though Twitter actually lost 64.6 million dollars last quarter and has a long history of not being profitable.
#2 It is being projected that after the IPO Twitter could have a market valuation of more than 13 billion dollars.
#3 Twitter is not expected to make a profit until 2015 at the earliest.
#4 According to CNBC, Pinterest is currently valued at 3.8 billion dollars even though it has never earned a profit.
#5 Yahoo paid more than a billion dollars for Tumblr even though Tumblr’s revenues are so small that Yahoo is not even required to report them on financial statements.
#6 Snapchat, an Internet service that allows people to send out messages that “self-destruct”, is supposedly worth 4 billion dollars. But it actually has zero revenue coming in, and many believe that it is essentially worthless as a money making enterprise. For one extensive analysis by a tech blogger, please see this article.
#7 The stock of Rocket Fuel, an online advertising company, is trading at about 60 dollars a share and it has a market valuation of about 2 billion dollars even though it has never made a profit.
#8 The stock of local business review website Yelp is up 241 percent this year even though it has never earned a quarterly profit.
#9 Fab.com just raised 165 million dollars from investors even though it recently laid off 44o employees.
#10 LinkedIn stock has risen in price by 136 percent since the 2011 IPO, and it is now supposedly worth more than 18 billion dollars.
#11 The head of engineering at Twitter, Chris Fry, got a 10.3 million dollar pay package when he joined Twitter last year.
#12 Facebook’s VP of engineering, Mike Schroepfer, earned 24.4 million dollars in 2011.
#13 Office rents in San Francisco (where many of these tech companies are based) are now 23 percent higher than they were at the peak of the real estate market in 2008.
#14 Facebook stock is up close to 140 percent over the past 12 months and the company is now worth more than 120 billion dollars.
And I am certainly not the only one that is concerned that we are repeating the mistakes of the late 1990s…
“When you look at valuations and look at the lack of earnings and revenue, it seems to me much like the dot-com bubble,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc. who helps oversee $10.2 billion. “This market looks a little frothy and Twitter is the personification of a risky trade.”
In fact, as the Wall Street Journal recently noted, we have seen some of these tech stocks crash more than once during the Internet age…
“It’s fascinating to me that today’s mini-mania includes shares of Amazon, Netflix and Priceline that have previously peaked and crashed before—in some cases they’ve peaked and crashed twice before,” says Darren Pollock, portfolio manager at Cheviot Value Management. “Stocks like these have again captured the imagination of speculators. We’re skeptical that there is enough underlying intrinsic value to many of the highfliers to support today’s prices.”
So how long will it be until the current tech bubble implodes?
That is a very good question. Please feel free to share what you think by posting a comment below…