In his new book on high-frequency trading, “Flash Boys,” Michael Lewis opens with the very simple premise he gleaned from watching the stock market crash in October of 1987:
“If you ever needed proof that even Wall Street insiders have no idea what’s going to happen next on Wall Street, there it was. One moment all is well; the next, the value of the entire U.S. stock market has fallen 22.61 percent, and no one knows why.”
Let’s stick with that “no one knows why” part of the sentence, because it still applies today when it comes to the huffing and puffing about the recent tech stock downturn and what it all means.
The Wall Street Journal weighed in with its patented version of a look-out-below story that it trots out every now and again, when it is not doing the hey-look-at-those-crazy-spending-geeks trope after there is some idiotic party here in the boom times.
Not now, since it is fretting time, people! Time to pop that persistent bubble, which still has not truly popped since I got here 20 years ago. (Dirty little secret of Silicon Valley: The bubble is made of graphene.)
Looking at the month-long downturn in public tech stocks like Facebook and Twitter and Yelp and Netflix, the piece ominously notes: “The result is a growing caution among some investors to buy into companies that might be struggling to show sufficient profits to justify their lofty private-market valuations.”
Intoned the Journal in its Papa-knows-best voice: “The next big test will come with Weibo Corp., the Twitter of China, which begins trading Thursday on the Nasdaq Stock Market.”
But wait! After some judicious cutting of the number of shares to sell and a lower IPO price, Weibo shares leaped upward 19 percent. Today, so far, it’s up more than 23 percent. So, then: Rethinking of the end-of-world tone!
Noted the Journal, in an epic bit of throat clearing: “Despite that sluggish start, the stock surged in its first day in the market.”
In other words, its very nice reporters have no idea what was going on with investors and neither does anyone else. (Me neither!)
And more — Yahoo stock, which had been declining on worries that its core business was in trouble, surged after its Q1 earnings showed an anemic one percent rise in revenue in its core business, but a huge performance by its Chinese asset, Alibaba Group.
Yahoo is still down about seven percent for the month and 10 percent for the year to date, but up more than 47 percent since a year ago. Google, too, is down close to 10 percent for the month and more than four percent for the year to date, but up 36 percent in a year.
Let’s look at more to show just how confusing it is to tease out an actual trend that makes any sense, since tech companies’ valuations are all over the place:
Facebook is up 115 percent from a year ago and close to eight percent for the year to date, although down more than 14 percent for the month. But Microsoft is up more than five percent for the month, seven percent year-to-date and 39 percent in a year. And Apple is up 22 percent for the year, down just over six percent year-to-date, but only down .34 percent in a month.
And more: LinkedIn, which saw a furious run-up for a long time — so it’s not a real surprise there has been a correction and a taking of profits — is down close to nine percent for the month, 19 percent year-to-date, but off only 5.4 percent for the year.
Twitter is also sucking some wind, down close to 14 percent for the month, 29 percent year-to-date, but only down .24 percent in a year. Amazon, too, down 13 percent for the month, 18.5 percent year-to-date and 5.4 percent since last year.
But over at AOL, shares are up more than four percent for the month, down five percent year-to-date, but up 13 percent in a year.
You get the idea — you can cherry-pick your way to disaster or just make the simple point that things are not very clear and it is probably not a good idea to make casual predictions that it will all have a major impact until, you know, it does. While tech stocks are down as a larger group, for sure, it’s still rather shifty at this point.
Of course, the real worry here is the IPOs aplenty that are coming down the pike, especially the Alibaba one in the fall, as well as what it all means for startup valuations today and also acquisitions of some of those startups.
So far, those promising companies like Uber and Airbnb and a spate of others have been getting while the getting is good, garnering mountains of investment and multi-billion-dollar valuations. Investors so far have been lining up out the door, willing to fork over too much for a too-little piece of the best of them.
As for acquisitions, that’s also been a bit of a Roman bacchanal of late, largely between Google and Facebook, with WhatApp going to Facebook for $19 billion, Nest to Google for $3.2 billion and Oculus VR to Facebook for $2 billion.
Yahoo’s still picking up the little guys for too much and now mulling slightly bigger buys. Down in Southern California, Disney paid $500 million for YouTube video network Maker Studios, which has set off a frenzy about adjacent companies like Fullscreen.
Will the party stop soon? Probably not while big companies need to grow and sometimes have to buy that growth and the innovation that goes along with it. And not while there are some pending tasty treats to eat up, like Alibaba. Or when the next hot startup appears and gets pursued by a pack of VCs like the last sugar donut after a rave.
Still, bad times, too: IPO-bound companies with big losses but great promise — like Box — will get kicked around a bit, while similar newly public ones like Workday — off more than 21 percent in the month, but up 30 percent in a year — will get roughed up as well. And silly startups will get squeezed out, as they probably should.
Which is why the quote from Lise Buyer of IPO-advisory firm Class V Group at the end of the Journal story feels like a voice of reason amid the current situation:
“Those companies midstream [in the IPO process] are full-speed ahead, recognizing that whatever the market does in mid-April, may or may not have any impact on companies focused on a mid-May [debut or later]. If the downturn persists for six weeks or perhaps months, we may see a valuation impact. But those investing, even late-stage, in private companies are generally focused on where the market will be in six months or a year, not the next six days or a week.”
In other words, we’ll know when we know. Or, as Michael Lewis points out so wisely, when we don’t.
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