{"id":47819,"date":"2014-02-25T05:50:50","date_gmt":"2014-02-25T10:50:50","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=47819"},"modified":"2014-02-25T05:50:50","modified_gmt":"2014-02-25T10:50:50","slug":"silicon-valleys-tech-bomb-hatches-army-of-zombies","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2014\/02\/25\/silicon-valleys-tech-bomb-hatches-army-of-zombies\/","title":{"rendered":"Silicon Valley\u2019s Tech Bomb Hatches Army of \u201cZombies\u201d"},"content":{"rendered":"

By WallStreetDaily.com<\/u><\/a> \"Silicon<\/p>\n

The purpose of Silicon Valley couldn’t be more straightforward…<\/p>\n

Breed amazing and irresistible technologies that captivate the masses – and ultimately garner absurd<\/em> public valuations.<\/p>\n

The latest example is text messaging service, WhatsApp, which Facebook<\/strong> (FB<\/a>) is purchasing for a whopping $19 billion.<\/p>\n

What’s different this time, however, is that even Silicon Valley insiders are shocked at this massive price tag…<\/p>\n

Like Aaron Levie, Co-Founder of Box Inc. – an online storage company that’s about to go public in a multi-billion-dollar deal. He didn’t believe it when news of “the bomb that shook Silicon Valley” hit, in the words of The Wall Street Journal<\/em>.<\/p>\n

He received a text that simply read: “WhatsApp, $19 Billion, Facebook.”<\/p>\n

His response? “I thought, ‘I don’t know what those three things mean to each other, but there’s no way that this means that Facebook bought WhatsApp for $19 billion.’”<\/p>\n

Oh, there’s a way, Mr. Levie. And the implications for everyday investors like us aren’t good.<\/p>\n

Here’s why…<\/p>\n

New “Zombie Companies” Forming<\/b><\/p>\n

Facebook’s willingness to pay (way) up for WhatsApp immediately makes other Silicon Valley executives think that their startups are worth just as much, too.<\/p>\n

To them, the deal serves as a validation signal – that mobile apps do, indeed, warrant premium valuations.<\/p>\n

Heck, I bet you that almost every mobile app company in Silicon Valley updated their pitch books over the weekend. There’s nothing like using WhatsApp’s purchase price as a proxy to inflate the perceived value of your own company… and convince investors to part with their hard-earned capital, right?<\/p>\n

Therein lies the danger to us…<\/p>\n

By simply taking the amount Facebook paid per WhatsApp user ($42) and multiplying it by the number of users for any other mobile application, we can justify<\/em> multiple billion-dollar valuations all day long. But that’s the wrong way to go about valuing an investment.<\/p>\n

For one thing, not every company promises to be acquired. And very few get bought out at such lofty valuations as WhatsApp.<\/p>\n

If we’re only investing in a company because of its takeover potential, we’re going to end up losing money more often than not.<\/p>\n

More importantly, though, we need to avoid letting the hype over the deal influence how we evaluate startup investments.<\/p>\n

Remember, stock prices don’t follow users. They don’t follow page views, either, like so many dot-com era startups tried to convince us. They follow earnings. Period.<\/p>\n

So unless we can justify the same lofty valuations based on a hot startup’s ability to generate actual profits, we should pass. Otherwise, we’ll see a rash of “zombie companies” that are supported entirely by (clueless) investors.<\/p>\n

In case you’re wondering, WhatsApp fails miserably in that regard. Forget turning a profit, the company struggled to generate sales.<\/p>\n

At the time of the deal, the company had reportedly only booked $20 million in revenue. That works out to a staggering price-to-sales (P\/S) ratio of 950, based on the $19-billion acquisition price.<\/p>\n

Meanwhile, the average company in the S&P 500 Index trades at a P\/S ratio of only 1.6.<\/p>\n

Making Matters Worse<\/b><\/p>\n

The problems with the WhatsApp deal don’t stop with entitlement, though.<\/p>\n

In addition to existing startups falsely believing they’re worth just as much, we can expect the premium valuation to convince a new crop of entrepreneurs to get into the game.<\/p>\n

In other words, the deal is going to usher in a new wave of startups, intent on striking it rich, too.<\/p>\n

It happened in the aftermath of The Social Network<\/em>, which glorified Facebook’s origins. In fact, one of the best-known technology incubators in the country noted a 30% uptick in startup applications following the film’s release, according to The Wall Street Journal<\/em>.<\/p>\n

Bottom line: The fallout from “the bomb that shook Silicon Valley” threatens to harm everyday investors the most, as more and more startups look to convince us to part with our hard-earned capital to own a piece of their billion-dollar dream.<\/p>\n

Thanks to equity crowdfunding, raising capital from everyday investors has never been easier for startups.<\/p>\n

My advice to you? Don’t be a fool and easily part with your money. Instead, be more vigilant than ever before investing in any<\/em> startups.<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

The post Silicon Valley’s Tech Bomb Hatches Army of “Zombies”<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

Article By WallStreetDaily.com<\/u><\/a><\/p>\n

Original Article: Silicon Valley\u2019s Tech Bomb Hatches Army of \u201cZombies\u201d<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com The purpose of Silicon Valley couldn’t be more straightforward… Breed amazing and irresistible technologies that captivate the masses – and ultimately garner absurd public valuations. The latest example is text messaging service, WhatsApp, which Facebook (FB) is purchasing for a whopping $19 billion. What’s different this time, however, is that even Silicon Valley … <\/p>\n

Continue reading “Silicon Valley\u2019s Tech Bomb Hatches Army of \u201cZombies\u201d”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-47819","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/47819","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=47819"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/47819\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=47819"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=47819"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=47819"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}