Last summer, when temperatures in Tel Aviv touched forty degrees Celsius, it was hard to know what was hotter, the weather, or the wave of flotations by Israeli companies in New York. Those were the peak days of competition over talent in the local technology world, and the Ayalon Highway was emblazoned with recruitment billboards.
Despite the optimism on the market and the rush of millions of people seeking to ride the wave who were landing on the financial website that he runs, Investing.com CEO Omer Shvili told "Globes" at the time that "there's a bubble here that will burst at some point, because, as always, these things end badly." Six months later, it looks as though the numbers are proving him right: the share prices of most of the Israeli technology companies floated on Wall Street in 2021 have fallen by more than 50%, and some by 70% or more.
"Everyone has been talking about this in the past month, but since November-December I have been talking about a silent crush. The collapse of second-tier technology stocks is not felt, because the leading indices are mainly affected by the stocks of the giant companies, which are holding up well. Stock prices shrank by tens of percentage points even before January, and to my mind this is a natural reaction after the insanity of the first quarter of last year - many companies and entrepreneurs took advantage of the craze on Wall Street and held flotations at valuations that were divorced from reality.
"I'm not smarter than other people, I simply have a lot of mileage. I've been a stock exchange investor since the age of thirteen and an Internet entrepreneur since I was twenty, so I've had the chance to see many cycles of rises and falls, and it was therefore clear to me that at some point there would be a sharp correction," Shvili says.
"The value of a company is the sum total of the cash it can generate, and in the long run it has to generate a return, whether as a dividend or through consistent profit growth. It's true that the coronavirus pandemic accelerated digital processes that took six months instead of ten years, so there is a real revolution here and genuine value has been created.
"But the valuations became unmoored from reality, almost certainly because of the vast amounts of money that the central banks printed. Printing fast money will always cause side effects, and so the technological progress together with the cheap money led to a sense of euphoria and to illogical pricing," he explains.
"Wall Street is getting back to basics"
"Many entrepreneurs were drawn along by the banks. If you bring a 35-year-old founder to Wall Street and tell him that his company is worth $5 billion, there's no reason for him not to believe it. But I think that many founders and managers got confused. I would read interviews with entrepreneurs, and they would all talk about what valuation they could reach. No-one talked about what the business would do and what profits it would make. Half the unicorns thought about what their valuations were, and not about how they would support those valuations. To support a valuation of $10 billion, they would have to earn $300 million or $500 million, if not today then within three to four years. To raise $1 billion and throw a party with DJ? I don’t see the sense in it."
Are we getting towards the end of the declines?
"That's the million-dollar question, but I think that the wave isn't over yet. Many second-tier companies are still traded above their values and don’t justify their unicorn status. It looks as though Wall Street is somewhat getting back to basics, and companies that can't show a path to profitability will be punished, certainly if the interest rate environment changes.
"If the market collapses, it will be a disaster for the industry. Unprofitable companies that are dependent on raising finance will have to hold down rounds, which will make the options held by the employees worthless.
"For the sake of the State of Israel too, let's hope that the market holds up, because the state budget is to a large extent dependent on the taxes that these companies pay. In my opinion, everything depends on the Fed. If we really do see five interest rate hikes over the coming year, and ten-year bonds with current yields of 2% reaching 3.5%, interest rates will have risen from zero to 2%, and the Fed will trim its balance sheet, and that will change many models and there could be plenty of shocks."
Investing.com is a financial markets platform that provides analysis, tools, quotations, and data in real time from more than 100 securities markets around the world. The platform is displayed in over twenty languages, and has over 60 million unique users. Shvili has been CEO since 2019, after being involved in three exits worth hundreds of millions of dollars. Among other things, he worked at Playtech, which was floated in London, and together with its then owner, Teddy Sagi, he founded the Markets.com platform, which was sold to Playtech for $250 million.
You have exposure to tens of millions of investors from all over the world. What are your insights into investors' behavior in the past few months?
"We talked about the expected interest rate rises, and we have seen more interest on the part of investors in bonds and interest rate products. I presume that the noise surrounding an expected rise in rates is making investors start to monitor these things. Besides that, you can see a substantial decline in the number of searches on meme stocks like GME and AMC.
"Besides that, we have seen a decline in interest in 'Covid' stocks such as Pfizer and Moderna, and also a considerable decline in searches for second-tier cryptocurrencies, which investors were enthusiastic about last year, particularly Dogecoin. Nevertheless, retail investors are still interested in technology, crypto, and NFT, because that's what's making headlines."
The last time we talked, you said that it looked as though you should have invested in Bitcoin. What do you say now?
"Bitcoin itself is a revolution, and it's a completely legitimate asset. It's a currency with high liquidity that isn't controlled by states and can't be printed in endless quantities. You can't put the toothpaste back in the tube, because there are already financial institutions in this game and it's a huge market. Personally, I say that if it falls to $20,000 for a coin, I'm a buyer. Beyond Bitcoin and Ethereum there's a lot of hot air. There are all kinds of meme coins like Dogecoin, which is something between a joke and a swindle."
How did you feel when you saw all these valuations?
"A year ago, I wasn't jealous, but I asked, 'How come we're not at the party'? People in the industry bandied about numbers like $10 billion without blinking, and I said maybe I'm not in the right business. I thought maybe I was out of it and old, but now it can be seen that in the end things come into line. It took a long time to build Investing.com. It's a genuine business, and highly profitable, that this or that bubble, whether it grows or bursts, can't really harm."
Published by Globes, Israel business news - en.globes.co.il - on February 13, 2022.
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