Of Unicorns and Bubbles

In addition to profiling the story of the Oculus acquisition by Facebook, Vanity Fair recently featured articles about Unicorns (billion-dollar valuation start-ups), and the technology bubble. Current valuations are (again!) brought about by 7 years of easy money, where you have too much money chasing after assets. This can be good and bad: the abundance of capital has encouraged more people to come out to build companies; however, those that truly add value to our economy, or are profitable, are few and far between.

For an idea of how bubbly the sector is, take Jet.com. The brash four month old e-commerce startup out to take on Amazon.com raised $225m at a $600m valuation, and is going for another round at a $3b valuation! (See WSJ article)

If this is not a bubble, what is? The names are not without reason: Unicorns are mythical and bubbles have to pop sometime. What investors could do would be to understand the companies' business models and financials, if they are truly sustainable and defensible. Are the companies going after something faddish, that can be done without, or something essential, a technology that has the potential to change the world? The man on the street should also ensure that his income is not fully dependent on errand running start-ups, taxi disrupters, or freelance internet work. 

Around half of dot-com era companies such as Amazon and ebay survived the last crash to emerge as the tech behemoths they are today. Perhaps the best test for the companies would be the bursting of this bubble with more rounds of financing, as it would purge the wannabes or "unicorpses", and leave the strongest standing. Another way would be for them to be to go to market, where they will have to reveal their performance numbers and investors can then ascribe a true value to them. The rest of us will just have to be wary as we watch this bubble grow. 

In search of real growth - Part 1

As highlighted in my previous post, QE, or printing money, cannot be a source of real or long-term growth. Instead of depending on injected steroids, the economy will have to depend on some real muscle to achieve sustainable growth.

These sectors and their related companies seem to be the diamonds amongst the rubble (or bubbles), and are the rising stars; they are likely to be the sectors with the greatest job creation, as well as the catalysts of growth for the American/global economy for the next decade...

1. Big data/Internet of things

On the premise that there is value in data; data can be mined to understand relationships, predict trends, and save costs. Think Palantir and Cloudera who receive million dollar contracts from governments/corporations to study and store data. For the Internet of things, which relies on Big Data, Nest, which was acquired for $3.2b by Google in the beginning of 2014, will revolutionize the ways things work at home.

2. TV

We are witnessing the demise of cable. Instead, count on the internet to serve up your favorite shows to your TV. This will mean higher subscription revenues for the likes of Apple, Netflix, and Amazon. Netflix and Amazon have also started producing their own (award-wining) content to wean off media companies such as 21st Century Fox and Time Warner Inc, while also increasing their scale of distribution and margins. Attractively priced devices such as Apple TV, Google's Chromecast, and Amazon Fire stick will also increase the adoption for these internet TV services.

House of cards*, just one of the award winning series by Netflix.

*House of cards was not made by Netflix, but owned and produced by film and TV studio Media Rights Capital. The first season was then sold to Comcast Corp for on-demand rights. Still, it was a milestone in Netflix's successful foray into making and owning original content. 

3. Sharing economy 

The sharing economy not only redefined employment, it has also unlocked asset value by providing asset owners with additional sources of income. We wait with baited breath as Uber and AirBnB inch closer towards their mega-listings. The ultimate combination: Google invested $258m in Uber...imagine them ruling the roads with driverless cabs!

Possibilities from the Sharing Economy

4. Electric cars

Pump prices may be low, but that is not stopping the adoption of electric cars as supporting infrastructure (i.e. charging stations) is being rolled out. Even at an exorbitant price tag, there is still a waiting list for the the latest Tesla X model. Not to be left behind, BMW, and General Motors are racing to develop their own models. Warren Buffet invested in BYD, while Chinese billionaire Lu Guanqiu revived Fisker Automotive (Tesla's nemesis) as Karma Automotive with a $139m injection. Now, Apple wants to get into the game too. It is also a matter of time before the chasm is crossed and there is widespread adoption.

The Tesla model X with its X-wing doors presented by its visionary founder, Elon Musk

5. Life Sciences

Imagine being able to know where your health is headed, detect disease early, and understanding your DNA for ancestry or hereditary diseases. Theranos, 23andme are among the companies making it happen. Google, under its umbrella structure, Alphabet, has a Life Sciences division investing in various projects and has also invested in 23andme and biotechnology venture, Calico. According to Angelina Jolie, who underwent preventive double mastectomy after tests revealed she was at high risk of ovarian/breast cancer, " knowledge is power".

These are the first 5 sectors, I will continue with another 5 sectors in my next post...