Einhorn Says the New Tech Bubble Has Arrived


Billionaire hedge fund manager David Einhorn issued a warning to his investors. The message was simple: it isn’t whether or not there is a new tech bubble but rather when it will pop.
Einhorn is certain that high-flying tech stocks are currently in bubble territory.
In the quarterly letter to investors in his fund Greenlight Capital, Einhorn raised several great points that all of us should take note of.

“Now there is clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.”
“Some indications that we are pretty far along include:

  • The rejection of conventional valuation methods;
  • Short-sellers forced to cover due to intolerable mark-to-market losses; and
  • Huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.”

“…We decided to short a basket of stocks.”
“There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers. When the last internet bubble popped, Cisco … fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.”
“Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks.”

Obviously Einhorn is referring to the Dot-com bubble that burst in 2000 and argues that history is repeating itself.
He argues that investors back then were willing to suspend conventional valuation methods. Investors paid attention to metrics like average monthly users, total addressable market and PS ratio price-to-sales.
The markets are again relying on those metrics, Einhorn argues.
After the tech bubble burst, companies were again valued based on PE ratio (price-to-earnings) and other conventional metrics.
Exxon Mobil (NYSE: XOM) is the definition of stability, consistently outperforming the market and raising dividends all along. Here I’ll use Exxon Mobil as a reference for what sane valuations look like.
The company trades at a PE ratio of 13.68, a forward PE (price-to-future-earnings) of 13.3 and a PS of 1.017.
We know that Einhorn and Greenlight Capital are shorting some of the high-flying names that fit the fund’s bubble criteria. Let’s take a look at some of these names.
With a PE ratio of 655, LinkedIn’s valuation is sky-high. Even its PS ratio is much lower at 11.65, the valuation is simply too high.
Amazon’s PE ratio of 474 seems only a little less ridiculous when you look at the forward PE of 222. Amazon’s PS is actually a very attractive 1.8, though this stock certainly fits Einhorn’s criteria.
Twitter (NASDAQ: TWTR)
Twitter doesn’t have a PE or forward PE because it is actually losing $3.41 per share. Still, Twitter popped 73% on its first day of trading. The company fits Einhorn’s criteria to a T and I’d be very surprised if he isn’t short the stock.
Salesforce (NYSE: CRM)
Salesforce also loses money, though it is expected to become profitable soon and has a forward PE of 571. With a valuation like that and a PS of 7.5, I’d expect Einhorn to be short this stock too.
3D Systems (NYSE: DDD)
The maker of 3D printers has a PE of 102, a forward PE of 70 and a PS of 8.5. Though the future of 3D printing is promising, its profitability is still up for debate. Regardless, this stock is way too expensive.
Netflix (NASDAQ: NFLX)
The online-streaming service trades at a PE of 117, forward PE of 73 and a PS of 4.15. With a valuation that’s too high and increased competition and costs, this stock could be in serious trouble.
Tesla Motors may make one of the hottest cars in the world but its stock is simply too high. It isn’t yet profitable and its forward PE of 175 and PS of 12.35 suggest the stock is simply overvalued. A return to conventional valuation would surely price this stock significantly lower.
I personally own a couple of these stocks and, even though I fully expect these companies to survive the bubble-popping scenario that Einhorn predicts, I will certainly have to revisit my positions and try to look at them through David Einhorn’s eyes.
I strongly suggest you do the same if you own any of these names.
DISCLOSURE: I personally own shares of Tesla, Amazon and LinkedIn.

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