Business Technology

Sunday 31 August 2014

Einhorn may be blowing things way out of proportion

Adrian Weckler

Published 24/04/2014 | 02:30

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Adrian Weckler
Adrian Weckler

Is David Einhorn, one of the savviest investors around, right in detecting a tech bubble that will soon burst?

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Having predicted the Lehman Brothers crash, Einhorn's views deserve to be taken very seriously. On the other hand, a deeper look at some of the metrics he's pronouncing on seems worthwhile.

Einhorn's key point is that the market is set to "reapply traditional valuations" to tech firms. We all know the narrative here, which is one of tech outfits trading at ratios of 30, 50 or even 100 times their profit levels. While this is true for some tech firms (loss-making Twitter is a glaring example), in the biggest cases it often isn't true.

Take Apple, which makes about €36bn in profit (from around €150bn in annual revenue) and has a €370bn market cap. That's a valuation of 10 times earnings. And that doesn't even include €110bn in cash that the company has.

If conventional metrics are your bible, Apple actually looks cheap. To be fair, Apple is at its own turning point with revenues expected to gently slide for the foreseeable future.

You could say the same for King Digital, the recently floated tech firm that makes the iPhone game, 'Candy Crush'. It currently trades at $6.2bn (€4.5bn), which is 11 times its current $568m annual profit.

There are some other questionable assumptions in Einhorn's thesis, too. For example, Einhorn questions whether tech companies would be able to keep their highly skilled employees if they stopped giving them large amounts of equity.

Really? Would tech founders and 'rockstar' programmers really shuffle off to a bank or a brokerage or an insurance firm if they only made €120,000 instead of €500,000 in stock options? It's doubtful.

In my experience, talented tech types are a lot like musicians. The money is great, but it's not the reason they're in the sector. Kudos among peers and building things is generally their motivation.

Einhorn is a serious banker who deserves respect. But for the casual investor listening to his guidance, it's no harm to consider another side to the story.

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