David Einhorn's hedge fund—notable for shorting Lehman Brothers before it dry heaved out of existence—is ready to make it official: we are in the midst of another tech bubble.
In a letter distributed to investors earlier today, Einhorn puts it very plainly:
We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it's still just silly. This understanding limited our enthusiasm for shorting the handful of momentum stocks that dominated the headlines last year. Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.
In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.
Some indications that we are pretty far along include:
The rejection of conventional valuation methods;
Short-sellers forced to cover due to intolerable mark-to-market losses; and
Huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.
And once again, certain "cool kid" companies and the cheerleading analysts are pretending that compensation paid in equity isn't an expense because it is "non-cash." Would these companies be able to retain their highly talented workforces if they stopped doling out large amounts of equity? If you are trying to determine the creditworthiness of these ventures, it might make sense to back out non-cash expenses. But if you are an equity holder trying to value the businesses as a multiple of profits, how can you ignore the real cost of future dilution that comes from paying the employees in stock?
Einhorn doesn't name any names or specify how Greenlight is shorting the tech sector, but at a time when WhatsApp is worth $19 billion, Candy Crush is a publicly traded company, and enthusiasm for the most main of mainstream tech utilities is faltering, calling this silicon exuberance for what it is doesn't seem crazy. If it's not a bubble, it's at least a very nasty cyst.
You can read the full letter below.