Cracks In The Tech Bubble (That Doesn’t Exist)

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It’s “a technology everyone is going to have,” said Randy Churchill, a Bay Area real estate broker, as he was explaining why realtors use drones to shoot aerial videos of high-end properties. He’d hired a company for $500 to produce the whole schmear. A lot cheaper than using a helicopter and crew. These videos are expected to bounce around the social media and land, hopefully, in front of potential buyers.

And it’s illegal. The FAA prohibits commercial use of drones. But their commercial use is ballooning – and no one is going to be able to stop it, he implied.

Life in the Bay Area. It comes in waves of money that wash over the area and slosh around for a few years, only to recede again and leave many high and dry. These are San Francisco’s and Silicon Valley’s storied booms, bubbles, and – always – busts. Everyone loves the boom and the subsequent bubble that gets bigger and bigger as more and more money sloshes around with practically nowhere to go [well, not everyone loves them.

Then the inevitable happens. After having denied feverishly that any kind of bubble exists, people watch incredulously as the hot air hisses out of the very bubble whose existence they’re still denying. And afterwards, everyone had seen it coming. Because cracks had been visible for a long time.

One of the cracks is Twitter. The company went public in November at $26 a share and soared to $74.73 by late December, giving it a market value of about $40 billion at the time. It reported “earnings” yesterday for the quarter during which it had gone public. Its hype machine in overdrive, you’d think it actually made money, with headlines like, “Twitter Finally Turns A Profit…“ or “Twitter Ends 2013 With A Surprise Profit.” And yet, in the quarter alone, Twitter lost over half a billion US bucks.

So Twitter has some, let’s say, issues. The number of users grew by only 3.8% to 241 million, the fourth quarter in a row of slowing growth. Not a lot of users to begin with, when you think about the price tag of the company. And then there’s the fiasco of “timeline use,” one of Twitter’s own handy-dandy metrics that gets triggered every time a user refreshes the timeline page. It skidded from the prior quarter. So they’re going to redo things and tweak stuff, as CEO Dick Costolo explained during the earnings call, “to change the slope of the growth curve.”

Even the SEC, which hardly ever warns about the tricks of Wall Street, warned about these homemade metrics the day before Twitter’s IPO, though it assiduously avoided naming Twitter. SEC Chair Mary Jo White pointed out that “the link from metric to income and eventual profitability may not be clear or even identified.” Now that link is murkier than ever before.

Twitter raked in a net loss of $511.5 million on $242.7 million in revenues, based on Generally Accepted Accounting Principles, the infamous GAAP, the rules by which US corporations must present their results to investors. More than double the revenues from a year ago, more than 58 times the losses. Way to go.

But then Twitter applied its own set of rules, and instead of a mega-loss, came up with a “non-GAAP” profit of $9.8 million. Halleluiah. One of the items excluded from this well-crafted profit? $521 million of stock-based employee compensation expense. Part of this money is now audibly sloshing around San Francisco and driving up prices.

Unlike money-is-no-objective Twitter and startups with multi-billion dollar valuations, no profits, and minuscule revenues, San Francisco companies like Charles Schwab have to be profitable. They’re watching their costs – and costs are rising as the sloshing money drives up prices for everything in San Francisco. And now Charles Schwab is reacting. It told employees that over the next few years it would move a “significant number” of jobs from its headquarters – apparently over 1,000 – to other states, possibly Colorado and Texas.

Which induced Texas Gov. Rick Perry to gloat, ironically on San Francisco’s Twitter, “Looks like more California jobs coming to Texas.”

Schwab’s move would vacate about 225,000 square feet of office space in the Financial District, of the 744,000 square feet it currently occupies, the San Francisco Business Times reported. “Financial District” is increasingly a misnomer: jobs in financial services have plunged from 34,800 in 2007 to 26,600 by Q3 2013. Tech is moving in. Now that it’s awash in investor money, no one is looking at expenses.

The 375,000 square feet that Schwab used to occupy in the One Montgomery Tower before it pulled up some stakes the last time is largely occupied by LinkedIn. Startups Uber and Square – valued at $3.8 billion and 3.3 billion respectively – are spread out in Bank of America’s former office space on 1455 Market Street. Eventbrite is in Wells Fargo’s ex-digs at 155 Fifth Street. Gaming startup Supercell, which has a $3 billion valuation, is setting up shop where Banker’s Club used to be on the top floor of the Bank of America building.

Last time, when cracks appeared in the tech bubble, it didn’t take long for the sloshing money to evaporate. It didn’t go anywhere else. It just disappeared. The only trace of untold billions of dollars in investor money was the detritus left behind. And that was it – until a new wave of money washed over it.

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