Monday, March 9, 2015

Are We in a Tech Bubble? A Recap of a Jefferies Discussion with Lou Kerner

Key Takeaway

The current state of tech valuations (private & public) is always hotly debated, with a particularly sharper focus recently. To this end, we hosted Lou Kerner for a discussion on the state of the industry and asked him to weigh in on the bubble debate. Lou's opinion is that while valuations in the sector may be high, they appear reasonable in the context of the broader mkt, and we are not in a bubble comparable to what was seen in '99-'00.

Some key takeaways:

Lou's full presentation is available at

The amount of people online is staggeringly higher than during the 2000 bubble. Between 1995 and 2000, the number of people online jumped from ~40MM to just above 400MM. However, between 2000 and 2014, that number skyrocketed to ~3B (with ~2B smartphones accessing the Internet). This growth is driving up valuations.

Multiple disruptive technologies are growing rapidly, and the convergence of this tech is enabling new business models. These technologies include mobile tech, social media, cloud, big data and crowd sourcing. Some examples of disruptive business models are Uber (mobile tech + crowd sourcing), WhatsApp (mobile tech + social media) and LendingClub (big data + crowd sourcing). The next wave of emerging tech (Internet of things, wearables, virtual reality, etc...) is poised to continue the wealth creation.

A look at some data:
·         When comparing NASDAQ growth CAGRs, we do not see the sustained outsized market gains present in the '00 bubble. Between Jan '90 and Jan '00, the NASDAQ experienced a CAGR of 26.5%, compared to only 9.1% between Mar. '05 and Mar. '15 (in line with the 44 year historical CAGR of 9.3%)
·         Tech co. market value as a percentage of the S&P 500 is actually currently below the LT trend. Currently, tech cos. comprise ~20% of the S&P, while they peaked at 35% in '00.
·         Day 1 IPO pops were massive between '98-'00, with the top nine IPO pops averaging a day 1 return of 505.2%. At the close on 4/5/01, those prices had dropped on average 96.1%. The top nine Day 1 IPO pops in '13-'14 averaged a return of 101.3%. The average first day pop of all IPOs in 2014 was 13%.
·         Additionally, the number of Tech IPOs by year has decreased significantly from the peak of 350+ in 1999. During 2013, there were less than 50.

Companies are taking a significantly longer time to IPO, with the average age at IPO of 8 years in 2013 more than double the average age of 3 years during 1998-1999. Companies are realizing that being public is painful, and that needed capital is available in the private markets. While Traditional VCs and Hedge Funds are ramping their private shares investing, traditional public share investors, like T. Rowe Price, Fidelity and Wellington, have also joined them in investing in the private markets. In conclusion, considering the puts and takes, Lou does not necessarily see the current landscape in a comparable light of the '99-'00 tech bubble. Tech valuations seem to be reasonable within the scope of the broader market, and the current opportunities for value creation from disruptive tech companies remain at all time highs.

Lou Kerner is the founder of the Social Internet Fund, investing in primary and secondary shares of private social media, mobile, big data, online video and ad tech companies. Lou was the first social media analyst on Wall Street at Wedbush Securities, where he started the first trading desk for private shares on Wall Street. Lou was also previously an equity analyst following media companies at Goldman Sachs.

Courtesy of Jefferies US Internet Team *,  Jefferies Equity Research