Since the NASDAQ fell 7.4% in three weeks, many headlines are suggesting this is the sign that tech stocks are in a bubble.
Time magazine declared ‘Every reason you should be worried about a destructive tech bubble.’
An expert talking to Bloomberg is convinced the technology sector is frothy, ‘Shiller: Looks and feels like a bubble in Tech.’
And Bloomberg Businessweek warns that it’s not time to party like its 1999, ‘Silicon Valley Hears Echoes of 1999.’
The thing is, the NASDAQ overall is down only 3.7% since the start of the year. However, compared to this time last year, it’s still up a massive 21.39%…
As Kris noted in his World War D speech two weeks ago, many contrarian investors are too busy looking for a bubble or market crash. Rather than focusing on good investing opportunities, they focus on trying to avoid a bubble.
This reluctance means they miss on investment ideas.
Kris called it paralysis by analysis.
Like it or not, a share’s price at any given time is what the market thinks its worth.
There’s no denying tech stocks are very hot right now. Even some of the two most recently cloud based stocks have seen their prices soften a little.
Take Amber Road [NYSE:AMBR] for example. Amber Road made its market debut at US$16.95, which was well above the IPO price of US$13. Yet, in three weeks, it dipped 15% to US$14.41.
Another recent had-to-have cloud company was Rubicon Project [NYSE:RUBI]. It’s initial price was quoted from US$15-$17. It commenced trading at US$21.02, only to fall 2% since then.
Initial trading may have seen some speculative investing in these companies, but this doesn’t mean there’s a bubble brewing in the NASDAQ.
The NASDAQ isn’t in a bubble.
Let me explain.
It’s still trading 26% below its May 2000 peak of 5,408.
And unlike 1999 and 2000, there are fewer initial public offerings (IPOs). During this time, 794 tech stocks went public on either the NASDAQ or the New York Stock Exchange.
Compare that to 2012 and 2013. As the NASDAQ slowly marched towards 4,000 again (the first time in 14 years) only 86 tech firms listed.
And although I declared this year, ‘the year of the cloud’ for stock listings in the US, so far only 10 companies have begun trading this in 2014.
It may seem that the valuations of tech companies are out of hand. Adding to the perhaps irrational exuberance when it comes to buying of tech stocks. But that’s not the case either.
During 2012 and 2013, over US$30 billion was invested in new public companies. However, that’s nothing compared to the US$82 billion invested in 1999 and 2000.
This year, barely US$1.6 billion in tech stocks have listed.
In spite of this, over at Reuters, they reckon the sign of a bubble brewing is the imbalance of voting rights of shareholders.
‘The best description of the stock being harked in this way is “coattails equity”. It offers little beyond a chance to tag along with entrepreneurs from Wall Street, Silicon Valley and China. Buyers of shares in IPOs such as those of Box, Grubhub, Moelis & Co, Virtu Financial and Weibo – and probably the $100 billion-plus giant Alibaba – must give up the rights that have traditionally accompanied the ownership of common shares, like a representative voice in corporate decisions.’
What Reuters mean, is a dual class share system.
Now this isn’t actually uncommon. Many companies, especially tech ones have often favoured Class A and Class B shares to ensure control remains with the founders of a company.
However, the frequency which companies are choosing this option is changing. Rather than happening occasionally, most new tech firms listing are going with a dual class system.
Take Box Inc’s recent filing to list. It’s offering two classes of shares, Class A and class B. In this case, Class A shareholders will get one vote per share, and Class B shareholders will get 10 votes per share.
Google is the same. The Class B shares have ten times the voting rights of Class A shareholders.
Recently, Google [NASDAQ:GOOGL] they spilt the stock and created another non-voting Class C stock [NASDAQ: GOOG].
The short of it is, this spilt was all about giving the Google founders, Sergey Brin and Larry Page a greater portion of control over its company.
Facebook [NASDAQ:FB] did the same thing with its IPO. The class system was skewed in Mark Zuckerberg’s favour.
It appears that the founders of the companies want to tap the market for funds, without handing over control. This isn’t a bad thing though.
When you buy tech stocks, a lot of the time you’re buying into the founder’s idea.
Becoming a shareholder means in one way, you support the founder, creator or investor of the technology. In addition, it means that you believe in their dream to take the company one step further with the technology or the product.
Reuters may think this further sign of a bubble. I disagree.
It’s more a case of company founders keeping control of their project.
After all, if you don’t like the direction a firm is taking, you can always sell your stake in it.
Shae Smith+
PS. If you haven’t seen technology analyst Sam Volkering’s latest report, I recommend you watch it here. In it, he explains why he believes the tech sector is the best place to invest your money today, and reveals a little about the four companies he’s backing for big gains over the next three years. Click here to watch it now.