Big thanks to Kathleen Hays for having GVA Research on Taking Stock yesterday to discuss the outlook for tech stocks in 2016.
Venture Capital Sector Slowing:
The excesses seen in late-stage start-up company valuation with the creation of multiple $1bn+ valuation unicorns will be limited in 2016 as fund flows to sector slow with more attractive returns being offered in other asset classes. Sector insiders concerned that 2015 saw more “prints” (i.e. valuation mark-ups due to funding rounds) than “exits” (i.e. IPO or merger) despite public market conditions that were on balance relative favorable. At some point, private company valuations need to validated by either a market event (i.e. IPO or merger). Hudson’s Bay Company proposed $250mm acquisition of eCommerce firm Gilt Groupe, a start-uo with a $1bn valuation based on a 2011 $138mm funding round, should raise concern among investors. Meanwhile, the pullback of established public companies from pursuing “acqui-hires” to bring on capable talent offers further evidence private company valuations are out of line with levels where acquirers can create requisite returns. Arguably, a rising yield curve will on the margin shift capital away from venture capital.
Time to look away from FANG?
With interest rates low, shares of high growth/low profit companies have received high valuations. Companies such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), popularly known collectively as the FANG, have benefitted as monetary conditions supported high duration investments. As such, investors may shift their focus towards tech sector names that are well-aligned with underlying secular growth trends but offer investors total return through dividend payments and are thus lower duration investments. Consequently, companies such as Microsoft (MSFT) and Apple (AAPL) may outperform. Away from changing monetary conditions, slowing global economic growth and negative foreign currency effects (i.e. strong U.S. dollar), tech sector performance may be dampened to extent late-stage companies pursue IPO exits over course of 2016.