It’s time for investors to dream big again. As big as the ocean, the moon and the stars. As vast and wide as your imagination will go, and then find another gear and take it up a notch.
A new tech stock boom is in progress now that will dwarf those that provided massive profits to brave, smart, cunning investors in the tech stock boom of the 1990s and the 1960s.
It’s happening right before your eyes, if you know where to look and can shake off the memory of what tends to happen after tech stock booms: those pesky crashes that wipe away the winnings of investors who are not crafty enough to get out of the way once everyone they know is on board.
The latest evidence: The mind-blowing purchase by Facebook (FB) of a single smartphone app company called WhatsApp for a whopping $16 billion in cash and stock. For a five-year-old consumer services company with only 32 engineers that most people over a certain age, let’s say 35, have never heard of? For a company with a single product that has never made a profit? And whose founder and leader recently said that he had no plans to monetize his product until at least 2018, and it won’t be with ads because he hates them?
Could a company like this really be worth $16 billion, which, for perspective, is more than the value of S&P 500 stalwarts like Humana, Transocean and Invesco?
|Dell started slow and made many mistakes, but over the course of the 1990s its stock rose about 50,000 percent.|
The outlay of that much money by a real-money investor for a single-purpose tech company is simply amazing, and shows what a crazy, exhilarating time we live in for people with vision and guts.
Here’s the thing …
WhatsApp, a mobile messaging app for iPhones and Android, is one of the fastest-growing young companies on the planet. It has 450 million users, of which 72 percent are active every day. And those users share a staggering 400 million photos a day. Consider that Instagram users share 55 million photos a day, while Facebook users share 350 million a day. So that 450 million number melts your brain.
Yet the deal makes sense, and therein lies the opportunity not just for Facebook shareholders but for all tech investors. Why?
Understand that newspapers were slaughtered at the start of the Internet era because they thought they were in the business of printing news and ads on paper and delivering these bundles to people at their houses by truck. In reality they were in the ad-supported news gathering and dissemination business, and if any of them had figured it out fast enough, they could have ditched their expensive presses and paper contracts and trucks — and survived and thrived in the Internet age instead of being steamrolled.
One of the modern principles of business is that you have to develop the next business that destroys your old one before your competition does. You have to get out in front of the tide of innovation. That is what Facebook did with Instagram, which it bought for $1 billion, and that is what it is doing with WhatsApp.
It has determined that it is in the business of connecting people who want to share stuff about themselves, and selling those users to advertisers. It doesn’t matter if that platform is on the desktop, as Facebook was originally, or is done with photos alone, as with Instagram, or with instant messages with photos, like WhatsApp.
This is a smart move by Facebook, and it illuminates the path for all stock investors because it immediately puts a new floor under the price of growth companies, not just in the mobile communications space, but in business-to-business and consumer devices as well.
Venture capital firm Sequoia invested about $8 million in WhatsApp a couple of years ago and is reaping a $3.5 billion reward.
That’s a return on capital that you and I are very unlikely to ever attain on a single deal. But it illuminates the plain fact that there are dozens of small companies out there like WhatsApp, emerging growth stories that could advance by 10 times in the next few years, or 1,000 percent. Absolutely.
And yes, I did say 1,000 percent. It seems like a long time ago, but every investor used to dream of finding a company with such awesome potential that it could be the proverbial 10-bagger. The kind of stock that advances so much you worry about it dominating your portfolio.
In recent years, this sort of dream has dimmed as a result of a decade of lowered expectations. Now the hot topic among even young investors is often more about Vodafone’s awesome dividend or the opportunity for natural-gas pipeline consolidation.
Well, as I say, I think it is time to dream again.
Quite a few remarkable young tech companies have gone public lately whose operational strength, unique business value and fundamental value deserve our attention. I’m not talking about insipid mayflies like Groupon (GRPN) or Zygna (ZGNA), but high-growth outfits with patent-protected engineering orientations that have riveted the attention of market cognoscenti, but not the public.
Which ones? Before I go there, permit me a quick flashback.
I started investing seriously in the mid-1980s. I was captivated by the action in Microsoft, Intel, Oracle and PeopleSoft, but later Cisco Systems and its many competitors like Bay Networks and Ascend. Later Dell came along, which very few people really understood. It started slow and made many mistakes, but over the course of the 1990s it rose about 50,000 percent. Ask anyone who was there and they will tell you the same thing: it was the most fun stock to trade of all time.
But those computer, networking and database stocks were only a prelude to the trading of Internet stocks in the late 1990s. I went to work for Microsoft to help start the finance channel of MSN in early 1997 and vividly remember the launch of Amazon.com (AMZN) in April that year.
All the wise guys said Amazin’ was overpriced and could not survive. Yet it actually rose more than 1,000 percent in its first two years. Yahoo! was also considered overpriced even though it was dominant at the time, and rose more than 5,000 percent in its first three years. Google, you may recall, was hotly debated in mid-2004. It actually never looked back from its open and rose 575 percent in its first three years.
Of course there were many companies that started strong in that era and then absolutely disappeared. Who can forget stocks like Netscape, Excite, Metromedia Communications, Exodus and Go2Net? Well, actually they were very forgettable as they crashed and burned. But there are also many survivors that rose 7,500 percent or more, such as chipmakers PMC Sierra and Applied Micro Circuits, before crashing 99 percent to the levels where they trade today.
The reason I am mentioning all this is that the lesson most people took away from that era was that bubbles are bad and lead to ruin. But that’s actually the wrong message.
The first challenge today is not to become overly obsessed with the wipeouts, as painful as they were, but to remember the possibility of such incredible advances.
The greats like Amazon.com, Priceline.com, and Yahoo! were not obscure when they went public, but it did take a growth investor’s imagination and optimism to think that they could scale the heights that lay ahead. Bubbles are terrible when they pop, but they are fantastic when they are inflating and speculators need to be willing to have the guts to participate, within their means.
The second challenge is to recognize that when the music ends the chairs are yanked away pretty fast.
And yet, the third challenge is to recognize that there will be many scary moments before the very end when the music changes tone, but doesn’t actually end.
Sound complicated? It is. That’s why they are called challenges. But it can be exhilarating and very lucrative to figure out the whole business of emerging growth stocks, which is why we care.
In the early 1990s, the name of the game was the birth of the low-cost PC and the spread of networking and low-cost enterprise data storage (Dell, Cisco, EMC). The late 1990s were the dawn of the Internet as media distributor (Amazon, Yahoo!). The mid-1990s were about the birth and maturation of the online bid and advertising model (Google, Priceline.com, eBay) and the late 2000s were about the dawn of mass consumer and enterprise mobile communications (Apple, F5 Networks, Salesforce.com).
What came next was unveiled in 2012 and 2013 in the initial public offerings of companies like Splunk (SPLK), Workday (WDAY), Tableau Software (DATA), ExamWorks (EXAM), DemandWare (DWRE), Cornerstone OnDemand (CSOD), and, yes, Facebook and Twitter.
The opportunities are out there right now, and growing more intense every day as young engineers are sparked by the example of WhatsApp to dream bigger than ever. And when that happens, they create new businesses, or work harder at the ones they’re at, to chase the big rewards — and shareholders benefit too.
In summary, the mobile, social, curated Internet — and the data-centric way companies are learning to exploit it — is just getting started as a business in the public markets and will create the greatest new wealth burst of the decade. So you need to participate. Stick with me, and you will.
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