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Remember all the hype over Twitter Inc. (TWTR) when it went public in the fall of 2013? The stock IPO’d at $26, then soared to almost $75 by the end of the year. But it’s been one long, sickening slide ever since – with the stock hitting an all-time low of $15-and-change earlier this week.
How about the Square Inc. (SQ) IPO back in the fall of 2015? The payment processing technology firm is headed up by Twitter CEO Jack Dorsey, and it got a ton of adoring press. But after going public at $9 … then rising as high as $14.78 the next day … the stock has gone into freefall. On Wednesday, it slumped below its IPO price and kept on going.
Then there’s the crafts and personalized gift site Etsy Inc. (ETSY). It’s down 83% from its IPO day peak. And water and drop-resistant camera company GoPro Inc. (GPRO). It’s down 90% from its 2014 post-IPO peak.
Lots of people I know are wearing products from the fitness tracking band company FitBit Inc. (FIT). But its shares have still tanked 69% from their summer peak. Internet storage firm Box Inc. (BOX)? It’s down 64% from its early 2015, post-IPO peak. And flash storage firm Pure Storage (PSTG) is down 37% from its October 2015 peak.
Even the broad-based Renaissance IPO ETF (IPO) is plunging. It’s down 15% year-to-date, and 33% from its IPO mania peak in early 2015.
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What’s going on here — and what does it mean for the markets? Simple. Too much easy money from too many sources all over the world inflated the value of a wide, wide range of assets in the past several years. Junk bonds. Stocks. Art. Collectibles. High-end real estate. You name it.
The massive flood of easy money, coupled with rock-bottom interest rates, also encouraged investors to dog-pile into anything with a good story, a halfway decent yield, or promises of pie-in-the-sky future growth (present losses be darned).
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| Many tech companies got swept up in the mania. |
Many tech companies got swept up in the mania, particularly in the private, pre-IPO-stage market. A whopping 100 startups were valued by private equity investors at more than $1 billion each as of early 2015, earning the sobriquet “unicorns.” Huge, expensive office parties … massive bidding wars and signing bonuses for tech-sector employees … sky-high Silicon Valley real estate prices and rents: They all came with the boom, just like we saw in the late 1990s.
But things were getting so out of hand by this past fall that I couldn’t help but call a spade a spade — and label it a potential “Tech Bubble II.” I also suggested that we’d see a wave of deflation in private sector valuations and that this would spill over before long into public tech sector valuations.
Sure enough, many unicorns are now raising money in “down rounds” — transactions that value their companies for less than the previous funding rounds did. Mutual fund firms that eagerly bought into hot pre-IPO companies are also writing down the value of those private shares. BlackRock slashed its valuation on Snapchat by 24% this past summer, while Fidelity cut its valuations on Dropbox and Zenefits by 31% and 48% respectively this fall.
As for the Nasdaq Composite Index, it came close to setting a new high during the fall rally. But it couldn’t hold those gains, and it’s now playing “catch down” to the other major averages.
I believe we’re likely to see even more pressure on all the various companies exposed to the tech sector now that the flow of easy money to tech start ups is draining out. Think suppliers of computers, tablets, phones, data storage services and equipment, and so on. REITs with exposure to California real estate are likely to suffer. Online and offline brokerage firms that feasted on the IPO boom are, too, as are banks that threw too much money at them.
I don’t think we’ll see an almost-80% wipeout in the Composite or anything like we saw in the early-2000s bear market. But a period of pain that reminds investors what happens when manias subside? It sure looks to be in the cards to me, and it warrants considering protective strategies.
What might those be? Raise more cash, sell down your tech exposure, and/or consider investing in inverse ETFs that target technology to hedge your risk. (I’ve been doing those things in my Safe Money Report for several months now. That has helped my subscribers protect and build their wealth since the start of the year — even as unprotected investors lose theirs.)
Until next time,
Mike Larson
P.S. My Interest Rate Speculator results have been on fire lately! Preliminary 2015 results are in, and my subscribers had the opportunity to generate annual profits of up to 38%. That’s in a year where the average stock lost significant ground, and the S&P 500 went nowhere. Moreover, individual trades soared as much as 129.5% … 170.8% … 248.2% … even 369.7%! Click here to join now!
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 13 comments }
Hi Mike
Can you see a big new round of IPO’s coming this year??
Mike
Do a look back analysis of the performance of SafeMoney over the past 5 years ?
John
I don’t believe any of the Weiss publications post their annual performance numbers…. Don’t know why… You would think they would be proud of their performance numbers…. Hmmm..
I agree 495. If I was really great at forecasting results everybody in the country would know about it,with the proof even the doughnuts.Honesty is a great thing even my father taught me that.
I think the trick with the fancy overhyped IPO’s is to buy the initial offering and sell it in a few days while it is rising. Be willing to settle for forty or fifty cents on the dollar gain and get out while the getting is good.
All of the social media and speculative tech stocks will crash. When the market gets really bad….and it will…..these will be first on everyone’s sell list. In fact, what you are saying shows it is already happening. And we have not even had a 20% drop yet. 80% wipeout in the Composite? Yep…..that and more. You have to read the charts.
The trouble is there are some really good companies, with good ideas and prospects, in amongst the junk. Do you buy them now and potentially watch them sink along with the tech composite, or wait til the crash and then pick over the bones?
Make a shopping list. But be warned: if you think it’s bottomed, wait.
Former Wall Street Journal reporter Jessica Lessin, who now publishes “TheInformation.com”, actually coined the term “Unicorn”, to mean a startup with a billion-dollar valuation. The Information has become my favorite guide to the global venture capital market that’s centered in Silicon Valley. A recent series of articles there, details how major VC firms could take immense losses over the next two quarters, and gets into the defensive moves that tech startups are taking.
A key problem is the granting of Restricted Employee Stock Options, a procedure by which tech startups hold some common shares in reserve, granting workers the right to buy them at a fixed price, and sell them on some date, usually 6-18 months after the IPO. If the company seems to be thriving, these options offer the employee a large post-IPO windfall that’s tax-leveraged, which employees are invited to use as savings or place in a retirement account.
Trouble happens, when the tech startup burns through it’s working capital before it’s revenues exceed it’s operating costs. If that happens, but the valuation has grown, usually more funds can be raised.
But if the valuation shrinks, the tech startup must grant new buyers a better buy on their shares, than it offered investors who bought its’ previous rounds. This can cause those employee stock options to become meaningless…if the valuation drops, then the IPO price may be less than the option strike price.
As The Information’s Alfred Lee points out today in a copyrighted article, securities firm T Rowe Price has marked down all 8 of the pre-IPO tech firms in which it has invested money. In the final quarter of 2015, T Rowe Price hacked down their valuations by a range from 6.7% to 50%, which essentially forces the tech firms to adjust their own valuation lower.
The advantage of selling pre-IPO shares to a mutual-fund manager like Price, is that the tech startup avoids the scrutiny of quarterly SEC reports and the necessity of setting quarterly income targets.
The disadvantage to the investors, is they have nowhere to sell their shares, if they want out early. In a rising-valuation market, the risk is asymmetric…the investor could wait many months or years, until the shares can be sold. But in a declining market, the investors’ problem becomes also the startup firm’s problem. The pre-IPO stock is illiquid, meaning that there’s no way for outsiders to bid on the shares if the existing owners lose faith in the company and want to sell.
Hopefully, after a bloodletting like this one, venture capital firms will insist on IPO’s much earlier in the development of startup companies, which will spread the gains among greater numbers of smaller investors.
Former Wall Street Journal reporter Jessica Lessin, who now publishes “TheInformation.com”, actually coined the term “Unicorn”, to mean a startup with a billion-dollar valuation. The Information has become my favorite guide to the global venture capital market that’s centered in Silicon Valley. A recent series of articles there, details how major VC firms could take immense losses over the next two quarters, and gets into the defensive moves that tech startups are taking.
A key problem is the granting of Restricted Employee Stock Options, a procedure by which tech startups hold some common shares in reserve, granting workers the right to buy them at a fixed price, and sell them on some date, usually 6-18 months after the IPO. If the company seems to be thriving, these options offer the employee a large post-IPO windfall that’s tax-leveraged, which employees are invited to use as savings or place in a retirement account.
Trouble happens, when the tech startup burns through it’s working capital before it’s revenues exceed it’s operating costs. If that happens, but the valuation has grown, usually more funds can be raised.
But if the valuation shrinks, the tech startup must grant new buyers a better buy on their shares, than it offered investors who bought its’ previous rounds. This can cause those employee stock options to become meaningless…if the valuation drops, then the IPO price may be less than the option strike price.
As The Information’s Alfred Lee points out today in a copyrighted article, securities firm T Rowe Price has marked down all 8 of the pre-IPO tech firms in which it has invested money. In the final quarter of 2015, T Rowe Price hacked down their valuations by a range from 6.7% to 50%, which essentially forces the tech firms to adjust their own valuation lower.
The advantage of selling pre-IPO shares to a mutual-fund manager like Price, is that the tech startup avoids the scrutiny of quarterly SEC reports and the necessity of setting quarterly income targets.
The disadvantage to the investors, is they have nowhere to sell their shares, if they want out early. In a rising-valuation market, the risk is asymmetric…the investor could wait many months or years, until the shares can be sold. But in a declining market, the investors’ problem becomes also the startup firm’s problem. The pre-IPO stock is illiquid, meaning that there’s no way for outsiders to bid on the shares if the existing owners lose faith in the company and want to sell.
Hopefully, after a bloodletting like this one, venture capital firms will insist on IPO’s much earlier in the development of startup companies, which will spread the gains among greater numbers of smaller investors.
I would like to unsubscribe.
Call me a pessimist but…
I wonder if the Paying off to Iran of the $150 Billion had some influence on these
tech companies… That money had to be invested somewhere.
Any other suggestions?
This is a most interesting read, in particular the comments. I cannot figure out why the various writers at Weiss keep slapping themselves on the back instead of just presenting useful facts and data with candid remarks including where they may have not been infallible at times. Back slapping leaves a bad taste in the mouths of readers, so please stick to the facts and stop behaving like used car salesmen reselling trash cans on wheels. We only shop for new cars, not junk.