By any standards, 2014 was a huge year for the tech sector.
Successful CEOs are still revered as gods, with Elon Musk staring down on mere mortals like Zeus from Mt. Olympus.
Yet valuations are high, and nowhere else in the market will you see more talk of irrational exuberance.
We saw IPOs get really close to the record from 2000, 2015 is looking to be just as big, if not bigger. We’re already aware of 120 companies trying to raise $84 billion.
All of this is leading to dire warnings of a tech bubble that is on par with the dot-com boom.
So is next year when it all comes crashing down? Or is this increasingly diverse class of stocks just getting started on an ascendant bull run?
Let’s pull the sector apart and see where this frothy mess is going in 2015.
Flush with Funds, but Under Scrutiny
I really don’t see tech crashing beyond potential corrections, but there are some systemic risks in the tech sector to closely watch.
It all has to do with how tech companies are getting off the ground.
The recession pushed a lot of companies away from IPOs and into the arms of billionaires and Silicon Valley venture capitalists.
This has created a cottage industry of finding hedge fund managers, and anyone else who is ungodly rich, and selling private investments in tech to them.
The risk comes in right there. Greed and fear could make this high-risk, high-reward paradigm utterly unsustainable because these private investors need to cash out sometime.
Public investor tolerance for the pure growth model is waning. Bleeding cash in return for market share is falling out of vogue.
Amazon got smacked hard for blowing tons of cash. Sure, it spent it on some duds that seemed like good ideas at the time, but Amazon shares have soared for years without the company ever really making money.
Twitter has suffered on revenue concerns, while Facebook has soared on positive revenue news.
2015 will see this trend become entrenched and more widespread, and it won’t be easy for a lot of these businesses to start acting like real businesses and, you know, actually make some money.
That won’t work out too well for the venture capitalists who own large chunks of cash-burning companies, and it may result in a slew of questionable IPOs tarnishing the sector as they try to cash out fast.
I believe we’ll see a mix of modest and absurdly high IPO share prices in 2015, and more companies that will see their share prices well below IPO values by the end of year.
As for how much the market can tolerate before herd mentality kicks in and people start fleeing the tech sector en masse, we’ll just have to wait and see.
I suggest watching tech IPOs for a couple months after they happen. If the quality of the companies drops and they start consistently flopping after going public, it may be time to worry about broader outflows from the sector.
In particular, if AirBnB and Uber go public, many investors will see them as bellwethers for the sector. Both have really high valuations, and analysts will falling over each other to get on the TV and scream about a bursting bubble if the IPOs go sour.
One of These Things Is Not Like the Others
We really should classify social media apart from everything else.
More mature companies that make devices or provide services — like Apple, IBM, Microsoft, etc., will simply rise and fall on quarterly earnings like more traditional companies, so there isn’t much to say for them.
The only thing I’ll point out is that they need to continue to adapt to greater and greater adoption of mobile devices or they’ll suffer.
Social media, with Facebook and Twitter dominating everything else, is at a crossroads though.
The prime metric investors needed to watch for social media companies in the past has been monthly active users. That is no longer the case.
The days of investors rewarding companies for simply adding more users is over. They need to make money off of them with sponsored content and ads while expanding the number of active users.
These two factors are the prime driver for Facebook shares soaring above their IPO price, and Twitter shares dropping off.
Facebook has 1.35 billion, and although the percentage gained each quarter has gradually dropped, the company’s ad revenue has surged.
Twitter, has also seen steady growth with tapering percentages of monthly average users, but the total number of users is at 284 million. Plus the ad revenue is simply not keeping up.
Share prices reflect doubts that the user interface can support much more monetization, and that the cost to increase the user base with the current ad revenue will be prohibitively expensive.
Private funds, as mentioned above, flood into social media start-ups, often to the point where there is little need to go public at all. Just look at the $22 billion final price tag for WhatsApp.
Venture capitalists will continue to dump millions into social media companies, give absurd valuations, and publicly tout them as “The Next Big Thing.” We can ignore them though. They’re just really rich IR salesmen.
2015 will have some more high profile acquisitions by the big guys that will push their share prices around in the short-term, but not mean anything long-term.
It will also see Facebook and Twitter struggle to mature and make more money. Facebook has had more success, and should have a slightly easier job.
The low hanging fruit for monetization is gone though, and it is running out of user interface real estate for sponsored content and ads. Plus, investors will expect constant growth or may ditch shares to lock in gains.
Twitter needs to figure out how it is going to incorporate more ads, while boosting ad prices, within a user interface that scrolls quickly and has no room for anything but a short headline.
It isn’t going to be easy, and I think we’ll see share prices languish or drop further in 2015.
Developing Themes in 2015
We’ve covered most of the tech sector, but haven’t addressed emerging themes. Right now, I see two in particular that are poised to rapidly develop in 2015.
First up are batteries. More batteries in cars. Batteries on roofs. Batteries on turbines. They’ll even be built into power plants and on the existing power grid. Seriously, batteries everywhere.
2014 saw a lot of news about Elon Musk’s gigafactory and how much of a risk it was. True to his reputation, those risks look like they’ll pay off.
It is still a bit early, but demand is going to soar and when the factory comes online it’ll be closer to capacity than many thought when it was announced.
Electric and hybrid car demand is growing, which Tesla hopes will account for a lot of the gigafactory capacity long-term, but so is demand for batteries to deal with volatile energy production from renewable sources.
The world now has 200 GW of renewable energy generation capacity, but will be installing that much annually by 2025. Plus, the IEA has said solar will be the largest source of electricity in 2050.
SolarCity, another Musk creation, is already installing batteries with the solar arrays they install for private and commercial properties.
Yet, traditional power plants are still a necessity, and will be for generations, if not forever.
To maintain profitability utilities need to run power plants as consistently as possible near peak capacity. That is increasingly difficult as more and more solar power and wind turbines comes online.
Going forward, that means they will have to start storing power and releasing it during peak hours and cloudy days, instead of shutting down and firing up plants in an inefficient matter.
2015 will see some large contracts going into batteries for the electrical grid as a result. Expect long-term deals worth billions to start popping up in business news headlines with increasing frequency.
Tesla shares are already very high, especially with current revenue, but there is a play for investors. High quality graphite will be in demand for high capacity batteries, and there is only one large domestic source.
The other emerging theme is wireless charging. We’re already seeing it in Starbucks and other restaurants, but it is woefully limited.
You have to leave your device directly on a pad, making them, and you, immobile.
However, new tech is emerging that makes wireless charging possible at distances up to 15 feet. The company making this possible already has 12 joint development agreements in place.
Plus, it closed a deal with Haier Wireless, a subsidiary of Haier Group, one of the world’s top-ranked global appliance manufacturers.
This could bring wireless charging into homes with power coming from fridges, microwaves, and other essential appliances.
Nick is investigating the company and doing his due diligence. From what I’ve seen so far though, you’ll be hearing a whole lot more about this very soon.
