After a sizzling 2013, Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX) remain Wall Street darlings, but Baupost President and CEO Seth Klarman thinks this is merely a byproduct of an extremely bullish market. In his latest letter to investors, a  copy of which was reviewed by ValueWalk, the tone was largely one of warning about growing bubbles, rising risk and “inadequate potential return almost everywhere one looks.” He also explained that it seems like technology companies are valued more for what they plan to do rather than what they have already done. (see part i and part ii here)

Tesla Motors TSLA

Building a “coalition of willing”

There’s no denying that last year was one of the best years for U.S., European and Japanese stocks in decades. As Klarman notes, key indexes S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite and the Russell 2000 continued to post multi-year or record highs throughout the year. In fact, 2013 was the S&P 500’s best year since 1997. And he says the key drivers were the stocks of “fashionable companies” like Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX), which were driven up by investors willing to participate in the highly speculative bull market that’s been going on.

Because of how bullish the markets were last year, he said favored stocks like those two companies and other “Internet favorites” like LinkedIn Corp (NYSE:LNKD) began to “become unmoored and unbounded.”

When business plans are worth more than profits

Klarman’s big problem with Tesla Motors Inc (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX), and other cult stocks is the fact that their valuations appear to be based on speculation.  For example, he notes that Tesla’s P/E is around 279, while Netflix was valued at around 181 times estimated 2013 earnings. LinkedIn Corp (NYSE:LNKD) has a P/E of 145, while Amazon.com, Inc. (NASDAQ:AMZN), which has a $180 billion market capitalization, traded at  515 times estimated 2013 earnings.

He also pointed to Twitter Inc (NYSE:TWTR), which soared from $26 to $45 a share on the very first day of trading. It was priced “at only twenty times its projected 2015 revenue” and has yet to turn a profit. He says one analyst suggests that Twitter might reach $50 million in “adjusted” cash earnings this year, which makes its P/E more than 500.

In short, Klarman sums up his apparent exasperation at the high valuation of these technology companies quite well with this statement:

“In Silicon Valley, it seems that business plans – a narrative of how one intends to make money – are once again far more valuable than many actual businesses engaged in real world commerce and whose revenues exceed expenses.”

Of course bull markets will always come to an end eventually, but what we don’t know is when or exactly how much those speculative stocks will be affected. Such corrections can be just as spectacularly bad as they were spectacularly good, however.