Will private tech bubble become a public one?

Dan, an Uber driver in Los Angeles, says his out-of-pocket costs reach about $5,000 a year.
CNBC
Dan, an Uber driver in Los Angeles, says his out-of-pocket costs reach about $5,000 a year.

Many stock investors have taken solace in a belief that if the Uber-fueled private technology bubble bursts it will be contained to Silicon Valley.

But that may not be the case if these private competitors to public companies lower valuations of the whole social media and messaging industry, investors said.

And many investors now have big money in both private and public worlds.

Consider the shutdown this week of music streaming service Grooveshark and Google-backed messaging app Secret.

Then look at the double-digit drop in public shares of Twitter and LinkedIn after disappointing earnings.

On the surface these events do not look related, but what if they are a sign that the public has finally had its fill of the thousands of social networking choices available?

There are 42 private "Unicorns" such as Uber, Aribnb and Spotify that are worth more than $1 billion. A slowdown in demand combined with a drop in easy funding could turn the Unicorns into donkeys and then hit the valuations of their public counterparts, some said.

Public "equity investors tend to believe two pools of money have more information than they do regarding their companies: private equity and venture capital," said Nicholas Colas, chief market strategist at Convergex. "If venture capital is pulling back on valuations for fast-growth technology, it sets a bad tone for public equity valuations."

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And many private company backers are big public investors as well.

Morningstar unearthed at least 100 mutual funds that now have big stakes in private companies such as Dropbox and Snapchat.

The Fidelity Contrafund, with $110 billion under management, has the largest private investments among public mutual funds with big stakes in Uber, Airbnb and Dropbox. Big stock investors with stakes in private companies also include the BlackRock Global Allocation fund and the T. Rowe Price Growth Stock fund, according to Morningstar.

When T. Rowe Price, a mutual fund firm from Baltimore long-known for its conservative, long-term investment style buys a stake in Airbnb, which turns your apartment into a hotel room, is there a risk of a bubble spilling over to the public markets?

"There is no question that the valuations are feeding off each other," said Brad Lamensdorf, manager of the Ranger Equity Bear active ETF. "The fact that Uber isn't public hasn't stopped the proliferation of ownership around the investment community."

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Public social media companies have been a good leading indicator of the whole stock market this year. The Global X Social Media Index ETF, which counts LinkedIn, Facebook, Groupon and Twitter among its top holdings, mirrors the performance of the S&P 500 this year.

Global X Social Media Index vs. S&P 500, 1 year

Source: FactSet

"A lot of private technology start-up valuations are bid up because of low rates, and a rise in rates would remove the 'private equity bid' from these valuations," said Eric Mustin of WallachBeth Capital. "The Renaissance IPO ETF, which is about 29 percent Internet stocks, the First Trust Dow Jones Internet Index and the Global X Social Media Index all could be ETFs that would see selling pressure from a rate rise."

To be sure, many stock investors still believe that private and public technology are two separate worlds.

"In public market investing, the success rate is higher because the business is more mature and access to capital easier," said Stephen Weiss of Short Hills Capital. "So when a private company blows up, it's gone. When a Twitter or LinkedIn hits a rough spot, it still exists but valuation is re-calibrated."