In poker, a “tell” is an unintentional or unconscious action that may (or may not) indicate an underlying intention… for example, a poker player may betray himself by (say) scratching his nose when he’s holding a great hand.
In markets, a “tell” is something that – usually in hindsight – signifies a turning point. We might be approaching a “tell” for tech stocks, which have seen a huge bull market in recent years. As shown below, since the global economic crisis, two of the most tech-heavy indices in the world – NASDAQ in the U.S. and the Shenzhen stock market in China – have performed far better than the rest of the world.
Since its lows in 2008-2009, the NASDAQ is up 283 percent and the Shenzhen has gained 310 percent. In the meantime, the S&P 500 is up 207 percent. Both have outperformed the S&P 500 and the MSCI World Index for the past two years as well.
One “tell” that a market is at the top is when one company acquires another at a price that – with a bit of hindsight – is a completely silly price, the stock market equivalent of paying $50 for a bunch of bananas. (The acquirer may advance an explanation for the overinflated price using language that, also with a bit of hindsight, also doesn’t make sense). In a moment we’ll get to the “tell” from a different era. But just now, web portal, search and internet advertising company Yahoo might be a tell for the tech stock boom.
Yahoo is in trouble. Revenues from its core search and advertising businesses have been flat for years, and dropped sharply last quarter. Despite being around many years longer, Yahoo is worth one-tenth as much as Facebook, and one-fourteenth as much as Google. It’s an afterthought in the digital world.
In early 2000, Yahoo had a market value of US$94 billion. Today it’s worth US$35 billion – and about US$30 billion of that is attributable to its stake in Chinese e-commerce giant Alibaba. It also has a stake in Yahoo Japan.
But if you take away Alibaba and Yahoo Japan, Yahoo’s core assets – its email and search functions, Yahoo finance, the Tumblr social media site and others – aren’t worth that much. Initial estimates of the company’s core assets were in the US$2 to $3 billion range. They’re up for sale, with final bidding expected in coming days.
According to Bloomberg, in late April there were 10 bids for Yahoo’s core assets, some of which were in the US$8 billion range. Rumored possible bidders include U.S. mobile company Verizon, several deep-pocketed private equity firms, and even a Warren Buffett partnership (he’s not buying shares, just financing a deal). The idea is that a buyer “might create synergies” by acquiring Yahoo’s business is often mentioned.
This is the Yahoo “tell.” If someone offers to buy Yahoo’s broken business for a few (or more) times than a reasonable financial valuation suggests it’s worth, this could be the “tell” of the top of the tech stock boom. It would mean that there isn’t much rationality left in the tech market, and that shares can only go down from here.
This all happened before. For investors of a certain age, the term “create synergies” might ring a bell. Near the top of the first internet bubble in January 2000, U.S. media giant Time Warner merged with internet giant America Online. At the time America Online (AOL) had 23 million dial-up internet subscribers and was the leader in providing internet access to American households. The merger resulted in a US$350 billion company called AOL-Time Warner. It is still the largest merger in history.
The deal seemed like a good idea at the time. It would “create synergies” between Time Warner’s media content (movies, magazines, cable TV) and AOL’s internet subscribers. When the merger was announced, Time Warner president Richard Parsons said the event marked “a pivotal moment in the unfolding of the Internet age.”
And it was a pivotal moment – but for all the wrong reasons. It was the event that signaled the internet bubble was about to burst (it was the “tell” of the end of the internet stock boom). In the preceding two years, the tech-heavy NASDAQ index had climbed 130 percent. But by mid-2002, it had fallen 76 percent.
In March 2000, AOL-Time Warner’s share price touched US$215 per share. Two years later it was trading at US$32 per share.
By January 2003, AOL-Time Warner posted a loss of US$99 billion, including a US$46 billion write-down of its AOL assets. At the time, it was the largest yearly corporate loss in history. Internet users were leaving AOL and its dial-up service in droves, and adopting the much faster access speeds of broadband. In September 2003, AOL-Time Warner Inc. dropped AOL from its name.
Finally, in June 2015, Verizon Communications acquired AOL assets from Time Warner in a deal valued at just US$4.4 billion – compared to the US$224 billion in was once valued at in early 2000. Time Warner’s current market value is about US$59 billion.
The merger was a US$290 billion mistake. It’s now studied in business schools as the worst merger of all time.
It was also a classic signal of a market bubble – a “tell” if there ever was one. In January 2000, any company with “.com” in its name was viewed as the next big thing and investors would pay almost anything to own a share of it. This drove stock prices up to ridiculous levels. Once people realised that most of these companies did not, and never would, make any money, the exodus started and technology stocks crashed.
Which brings us to Yahoo’s recent decision to sell itself to the highest bidder. Once again technology stocks have been hot. The two most valuable companies in the world are Apple and Google (now known as Alphabet). The NASDAQ composite index, where many technology shares trade, is now higher than it was during the dot com bubble (it took 14 years to get back).
Will Yahoo be bought for far more than it’s reasonably worth? Potential buyers are saying Yahoo’s assets will help them create “synergies.” A deal that would value Yahoo at $8 billion would only happen in a bull market and investors think there is still money to be made buying even over-priced assets. Yahoo would not be putting its assets up for sale if people weren’t excited about technology stocks.
Today’s tech stock boom is very different from the bubble that burst in 2000. Tech stock valuations are generally lower, and the technology market has matured. But if someone overpays for the Yahoo businesses that are for sale, or if a major buyout or merger involving different companies is announced, it’s a sure tell that the bull market in technology shares – NASDAQ and Shenzhen and elsewhere – is peaking.