GoPro Inc, Twitter Inc, Etsy Inc, Fitbit Inc, Box Inc: The Death Of The Tech Darlings

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January 22, 2016 1:17pm NYSE:IPO

dollar money bubbleMike Larson:  Remember all the hype over Twitter Inc. (NYSE: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. (NYSE: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. (NASDAQ:ETSY). It’s down 83% from its IPO day peak. And water and drop-resistant camera company GoPro Inc. (NASDAQ: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. (NYSE:FIT). But its shares have still tanked 69% from their summer peak. Internet storage firm Box Inc. (NYSE: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 (NYSEARCA:IPO) is plunging. It’s down 15% year-to-date, and 33% from its IPO mania peak in early 2015.

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).

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.

This article is brought to you courtesy of Mike Larson.

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