The Retaliation of Tech

The Retaliation of Tech

Long we have been used to tech stocks trading at price multiples (price/earnings) at more than the industry standard has been comfortable with for decades. Benjamin Graham’s ideal PE is between 10 and 15 dollars. The Dow Industrial is trading at 25 PE, the S&P 500 is trading at 25 PE. If you thought that the Dow and the S&P 500 are overvalued by Graham’s standards, here’s a look at the tech industry valuations. Amazons PE is trading at 316, Netflix is trading at 206 PE, Dropbox has a negative PE. However, what was evident this past two weeks is that these tech stocks are more correlated than initially thought. When one tech stock sneezes, the entire market catches a cold.

Facebook has fallen 14% since 16 March when the news of privacy breach by Cambridge Analytica has spread. This caused Apple to fall more than 5%, Alphabet and Amazon have fallen more than 8%, and last but not least Twitter fell more than 19%.

However, one knows that a cold eventually ends, and with these company’s being sugar-coated with net margins of more than 20%, and growth potential, innovation and barriers to entry, it is important to keep watch for those companies. They are more likely than not that they are trading at a discount. Most of these tech companies have very strong balance sheets. This means they are relatively low leveraged. A hawkish fed of increasing interest rates has lesser of an effect on their valuation extended to the end of 2018.

However, as a kid knows exactly when to catch an ice cream truck, a good trader knows when to enter a stock. Technical analysis 101 serves a good purpose. Many mistakes made by students these days are getting excited very fast, being scared to fast, and not admitting one’s own mistake like a toddler refusing to get out of a car.

As long as markets are trading above 50-day moving average, the trader should be thinking “buy the dip”, many do the mistake of directly entering the trade once the stock price has fallen, however the truth is to better forgo some profit for a safety margin to allow one’s self to be confident that the stock is actually reverting. The 100-day moving average, this line provides the support between the 50 days and 200 days. If it does not hold support, there is a high probability that the 200-day moving average is the next stop, this is the deeper pullback in bull markets. 200-day moving average, this is an indicator telling you which side a trader should be one, either a bull or a bear market.

It is important to know that moving averages are not the Holy Grail of trading they are tools to help the trader capture a trend in their own time frame.

The point is will tech stocks retaliate and gain back valuation and return to their highs? Or will they descend even further? Either way, liquidate and hold 100% cash and wait and watch for those moving averages, because at this level they have attractive risk/reward ratio.



Bassem Mneimne


Spotify goes public, not through an IPO

Spotify goes public, not through an IPO

Spotify will go public before the end of the first half of 2018 and has already filed confidentially with U.S. regulators for an initial public offering. Morgan Stanley, Goldman Sachs and Allen & Co to advise on the listing, acting as commission brokers that will only help selling the shares.

Spotify, the privately held Swedish music company, last valued at $20 billion,  will not be selling its shares and raise any capital through a standard IPO process but it will be the first large company to go public via an unusual direct listing on the NYSE.

Spotify is the biggest global music streaming service with 70 million paying subscribers as of January 2018 (compared with Apple Music’s 30 million), over 140 million active users worldwide and 30 million songs available to stream straight from the internet.

While Spotify’s losses are mounting – the company experienced net losses over the last 5 years and saw losses more than double in 2016 to 556.7 million euros – its revenues increased by 52.1 percent in 2016 and by 39% in 2017.

One of the reasons behind this unusual choice might be found in that the company had raised $1bn (£740m) in a debt deal with private equity companies in 2016. The deal provided that the debt interest rate would increase by 1% every half of a year until the company went public.

Moreover, Spotify’s listing would benefit not only its CEO Daniel Ek who controls 25% of the company and Martin Lorentzon, co-founder and director and former chairman, owning 13% of the company, but also Sony Music Entertainment International, Technology Crossover Ventures, Investor Tiger Global and Tencent which are the major investors of Spotify.

Company founders will retain control of the company by holding onto a separate class of shares, so-called dual-class, with enhanced voting power. The “dual-share” structure, employed previously also by Facebook and Alphabet, is not the only feature that sets this listing apart.


What is unusual about this

First, when a company decides to go public it does so by issuing new shares and increasing capital. However, Spotify decided not to go for the traditional route and thanks to the direct listing the private company will sell their shares on the market by bypassing the underwriting process by directly selling shares to investors at a price determined by the company without any help from investment banks.

Second, direct listings have occurred mostly in biotech and life sciences and have been limited to small-cap companies, Ovascience (market cap: $55 million) and BioLine Rx (market cap: $83 million) being two examples.

Third, when a company decides to go public it needs to register with exchanges, which are usually NASDAQ and the OTC market.  However, Spotify has asked NYSE to change rules, and for the first time it will go public via a direct listing on the NYSE.


The Process

The process for going public is very similar to the IPO. In fact, the business presentation, due diligence, prospectus preparation, and forms required are the same as for an IPO but with an exception. What is different is that a direct listing does not require the 2 week roadshow.

You will ask, is a roadshow really needed? Usually it is carried out in order to setting up meetings and interviews, so that the investment bank will increase demand. However, being Spotify a large company, with an established brand and a knowledgeable customer base, a roadshow is not really needed.

Direct listings can be compared to the opening of a shop and hoping people will just drop by. The store is open, but you do not have anyone marketing or setting up meetings.” says Kathleen Smith. Private shares will become legally tradable and therefore whoever owns Spotify stock will have the chance to offer it on the public market and slowly Spotify’s stock will begin trading like any stock.

However, since there will be no agreed ‘starting’ price it is unclear what will happen at  start of trading if the demand will be higher than the supply, hence we could see huge volatility (more than in an underwritten IPO) of Spotify’s share price.


Advantages of a direct listing

A direct listing will leave less money on the table as people will not sell their shares at a lower price. Moreover, since no new share will be issued there will be no dilution for existing shareholders.

In addition, investors can sell their shares more quickly as there is no lock-up period that prevents insiders from selling shares in the months following a listing. Finally, a direct listing requires no underwriters and  therefore is cheaper because of no fees.

To sum up, in three words,  direct listing is faster, easier, cheaper.


However, there are some disadvantages

Since there is theoretically no need for an investment bank, the company will not benefit from a professional support from investment banks (especially in terms of demand generation and liquidity support). Moreover, it will not have buffers against volatility (especially on the first day where volatility is usually high), and will not take advantage of presentation support from advisors (important for small to medium companies). In addition, its price will purely be determined by demand and supply and Spotify will not have any control over it.

Lastly, the company will be less likely to have long term investors, usually gained during the roadshow process.



Spotify’s unusual way of going public could change not only the way that large technology companies go public in the future especially those who do not need capital and would like to go public like Uber and Airbnb but could also impact investment banks’ business model as they would not be able to collect many underwriting fees. However, if Spotify, falls below the valued amount, it would probably not like a successful roadmap to follow.

Bitcoin: Is this time different?

Bitcoin: Is this time different?

Bitcoin: Is this time different?

Spoiler: NO.

Bitcoin is the buzzword of our decade, even grandmas talk about it in their tea sessions with friends. Is Bitcoin the future? Will it substitute fiat money? Has it really a value? The aim of this article is to address these questions with tested frameworks and examples from the past to provide simple and practical answers.

What is the value of Bitcoin? Is it a Bubble?

Well, let’s start from a very basic concept: there is no existing way to calculate Bitcoin’s value because there are no fundamentals or anchors to analyze and derive the cryptocurrency’s value. Furthermore, the average Joe has not fully understood Bitcoin, and no one knows who is actually behind the creation of the cryptocurrency. This environment of disinformation is fueling the irrationality of market participants, which are governed by the Fear of Missing Out on the next big thing. The extreme shifts in sentiment can explain why the cryptocurrency is the most volatile instrument at the moment, jumping from $19,000 to $13,000 in 6 days (16th Dec – 22nd Dec). Bitcoin has returned a stunning 1400% in 2017 and this raises concerns about the possibility of a bubble. However, the disruptive nature of Blockchain, which aims at eliminating intermediary costs and creating efficiency, does not mean that Bitcoin will be the future universal currency and does not justify such returns. Indeed, the price is held up only by the belief that someone else will bid a higher price in the future, no cash flows distribution or asset appreciation. Finally, by looking at some objective facts, Bitcoin matches all 5 criteria for a speculative bubble that Richard Bernstein, former Merrill Lynch Chief Investment Strategist, has expressed as follows:

1- High liquidity encouraging speculation – current monetary policies implemented by central banks;

2- Leverage increase – introduction of “Bitcoin future” which allow to buy more instruments with smaller amount of money;

3- Market “democratization” – everyone talks about Bitcoin;

4- Supply increase pushed by demand increase – more than 1,000 cryptocurrencies and dozens of ICOs (Initial Coin Offerings);

5- Trading volume increase – number of trades per day continue to raise.

These 5 factors give an objective definition of a bubble and Bitcoin seems to match all of them. Does that mean it is a bubble? No. It means that the cryptocurrency has all the prerequisites to be a bubble but that depending on how things will evolve, this market might crash or flourish. By still looking at facts, it is clear that investment banks’ behavior is fueling some of the causes of bubbles’ creation. For instance, Goldman Sachs has announced the implementation of a cryptocurrency dedicated desk within the commodity division in order to act as clearing house and charge fat fees on brokers (e.g. 100% margin). This happens because investment banks found in Bitcoin a way to profit from volatility during a low-volatility period of time. Commissions from trading have slumped in recent years, as testified by recent earnings releases of JP Morgan and Goldman Sachs, Bitcoin and Cryptocurrencies represent a valid alternative. This volatility appetite pushes banks to enter the market creating more supply to satisfy the raising demand and then increasing liquidity and trading volume, hence the probability of a bubble. However, not only banks are contributing to this risky game but Institutions seem to feed this bubble’s risk too. For instance, the choice of creating “Bitcoin future” from CME (Chicago Mercantile Exchange) has allowed more investors to enter the cryptocurrency market by investing a significant amount of money in products whose value derives from Bitcoin’s one. Exotic products like leveraged ETFs are waiting for approval from SEC administration, ready to attract more capitals in this modern gold rush.


Dotcom Bubble Case

Looking backward it is easy to spot bubbles and have a perfect accuracy in doing so, everything makes perfect sense after it has happened. The most similar example to what is happening today is represented by the Technology bubble, which lasted for more than five years from 1995 to 2000. The late 1990s were characterized by the Internet revolution, a period of rapid technological advancements and unlimited possibilities, at least on paper. The Internet promised to change everyday life in unimaginable ways, enhancing the potential growth of companies which would have dominated their markets in few years. Just add “.com” to the company’s name, fill a paper with stunning future prospects and unrealistic business plan and the game was on. During the formation of the bubble investors were thinking of the opportunity to be too huge to be missed, and that conventional metrics of evaluation were not applicable as that time was different. The availability of cheap money and easy capital thanks to low interest rates fueled the confidence of investors who consequently underestimated risks or totally neglected them. The froth pervaded all levels of investment environment from venture capitals to public markets; profits and revenues were not considered, only rising prices mattered. From 1995 to the peak of 2000, the Nasdaq Composite the major technology index, returned more than 1200% reaching a size of 3-5$ Trillion.

As the Federal Reserve increased interest rates reducing the liquidity available, investors started pulling money out of the market and panic selling was the ending of the bubble, until the bottom was found in late 2002.

Even if professional investors and eminent professors like Warren Buffett, Robert Schiller and Alan Greenspan warned of the “Irrational Exuberance” of market participants, the feedback loop of rising prices was enough to attract and finally destroy wealth.

If someone had invested at the peak in 2000, he would have got back his money only seventeen years later in 2017, when the Nasdaq Index made new highs. Internet has really changed the world, but negative returns for two decades are not attractive for any kind of investor.

Invest in Bitcoin… Or Speculate?

Investing and speculating are two very different things. Investing means strategically buying something which, according to qualitative and quantitative analyses, will have high probability to generate additional income or profit with a low downturn risk. This is the only essence of any wealth building over time. On the other hand, speculating has a significant risk of losing all the initial capital in change of an expectation of big gains which in other words means: betting. Pay attention, anyone decides to invest his own money as wished since different people have different risk profiles which means that they might prefer betting over investing or vice versa. Therefore, there is not right or wrong answer, it just depends on whether being and investor or a speculator. Furthermore, statistically speaking it is preferable to keep control of finances by reducing as much as possible the effect of random variables on investments, but probably someone else likes more the hazard of venturing. Bitcoin does not represent an investment opportunity but a speculative one, therefore the real question at the end of the day, should be: Are you investing or betting?


Authors: Alessandro Sicilia and Mario Stopponi

A ghost in the Street?

A ghost in the Street?

Today, is Tech day. Snapchat’s parent company will be trading today in the New York Stock Exchange with a price tag of $17.0 per share for a total valuation of $24 billion. It is the most awaited and the largest IPO since Alibaba started trading in 2014 with a valuation of $168bn. American capital markets have not seen many tech companies going public despite the growing number of unicorns in the tech sector. Investor will look at this IPO also to evaluate  the health of the Tech IPO market. Many start-ups prefer to stay private where they can benefit astronomic valuation as emerged in the latest financing rounds of Uber or Airbnb. Investors are thirsty of new tech stocks and Snapchat valuation seems to support the view. Some concerns remain, such as the profitability profile of the company and growth prospects or the scalability of Snapchat customer base.

Snapchat is the first of the 154 unicorns. Will it be a success story like Facebook or will it fade waway as fast as its instant messages? This is a million-dollar question that nobody can answer as of now. The only thing an investor can do is to look at the numbers. Compared to its peers Facebook and Twitter, at the moment of the IPO, the perception is that Snapchat lags the competition.

In terms of profits, Snapchat reported a net loss of $515m in the last reporting year before the IPO, compared to the $1.0bn generated by Facebook. In terms of Revenue Facebook was already generating more than $3.5bn justifying the higher price tag, and even if Snapchat is better positioned than Twitter at the moment of its offering is still not clear how Evan Spiegel, Snapchat co-founder intends to scale and increase its customer base which is the diriment factor in the Tech landscape.


Twitter stock has been hammered recently for discouraging data in terms of active user growth, despite improving financial performances, while Facebook has been the trendsetter both in terms of user growth and financial metrics. As of now, Snapchat is above Twitter but behind Facebook in terms of user base.


In terms of valuation, Facebook topped $100bn. The company was founded 8 years before, and it managed  to scale the customer base very quickly, transitioning from a tiny social network reserved to Ivy  League students, to the widest social media company in terms of active users. Its valuation reflected the higher premium paid for its wider base of users. Investors were willing to pay more to have their hands on this omnicomprehensive social network that from its IPO almost tripled the number of users. Snapchat is  more like Twitter, in term of multiple EV/users. The type of service provided is more  niche than Facebook, therefore its potential scalablity is less visible as of now.


Since the IPO, Facebook and Twitter had opposite faiths. Facebook investors at the beginning were reluctant. Upset by the lack of visibility of Zuckerberg strategy and the high valuation, they dumped the shares until August 2013. After losing more than 50% of its initial value, Facebook founder was able to restore confidence in the market improving user and revenue growth, diversifying its business model through key acquisition such as WhatsApp for the huge sum of $19bn and Instagram. On the other hand, Twitter reported strong performances in the very next days and weeks after its IPO, but then started to plummet on concerns regarding Monthly Active Users numbers. Since the IPO, Twitter share lost almost 70% of the initial value raising rumours of possible take-over by larger players.


The competition is getting stronger and tougher for Snapchat. One of the key elements of its success story were the possibility to create the so-called Stories, within the instant messaging tools provided by Snap. Those stories were videos 10s long with a 24h lifecycle. Recently, Instagram replicated the format. The number of users that uploaded their stories through Instagram rose 150M per day, approximately the amount of Snapchat total users. In 2017, Facebook and WhatsApp did the same, in the effort of riding this new trend in mobile messaging.

Will Snapchat be able to cope with the increased competition in the social media landscape largely dominated by Facebook and its group of companies? Everything will depend on the strategy Evan Spiegel intends to implement in order to make the company profitable and increase the customer base on a long-term basis.


Tancredi Viale