Reality suddenly mucks up the rosy scenario.
Many of our heroic “story stocks” are getting totally destroyed. Yet not much has changed: Their business model, if any, is the same; they’re still losing money hand over fist; and they’re still trotting out the same custom-designed metrics that seduced analysts and the media once upon a time. But it’s not working anymore.
After the drubbing on Wednesday – the Nasdaq plunged 3.4% and is down 13.5% from its high – we know one thing for sure: there will be a rally someday that lasts longer than a few hours. But something big has changed.
There was the old guard of new tech. Netflix plummeted 8.6% on Wednesday and is down about 20% from its 52-week high. Apple dropped 2.6% and is down 28% from its 52-week high. Facebook lost 3.9% and is 14% off its 52-week high. The list goes on.
But the real drubbing was reserved for the new darlings, the fruits of the recent IPO boom, and other “story stocks”:
Etsy dropped 4.9% for the day to a new low of $6.99. After its IPO at $16 in April last year, it spiked to $35.74 and has gotten whacked down 80% since. Twitter plunged 4.8% to a new low of $18.68. After its IPO at $26, it spiked to $78, from which it has now plunged 76%. Shopify plunged 10% during the day and is down 48% from its high in June.
Mobileye, which makes software for camera-based systems and sensors for (self-driving) cars, plunged 10.3% for the day, and 47% from its 52 week high. And yet, self-driving car tech is one of the hottest, most hyped wonders of the day.
Oh, and GoPro! In after-hours trading, shares plunged 25% to $11 a share. But it’s an exception among our IPO heroes: it has actual profits and a real P/E ratio! And it has a real business model, even if it resembles a one-trick pony that’s getting tired. Its costly cameras have to compete with smartphones that people already have. Wednesday after-hours, it announced the consequences: an atrocious holiday season, sales way below analysts’ expectations, and job cuts. It had gone public at $24 a share, soon spiked to nearly $100 by October 2014, and has since crashed 89%.
Peer-to-peer lenders deserve a special mention. These on-line lending exchanges connect consumers and businesses to a variety of lenders, such as credit partners or even regular banks. The story goes that they’re the future of banking.
Lending Club plunged 6.4% on Wednesday. The day it went public in December 2014, it soared 67% from its IPO price of $15. This was – as these things always are – properly hyped on CNBC. CEO Renaud Laplanche said it would “transform the entire banking industry.” The company had a market value of $9 billion, the size of the 14th biggest bank in the US. Stephan Paternot, an early investor, called it a “no-brainer.” Shares made it all the way to $27.90 before the hot air was let out. They’re now down 68%.
On Deck Capital, which makes loans to small businesses, went public in December 2014 at $20 a share, then instantly rose to $23.83. It has been downhill ever since. On Wednesday, it plunged 14% to $7.33, down 70% from its peak glory.
LendingTree, oh my. It plummeted nearly 30% on Wednesday to $61.14, leaving shares down 56% from their high in August last year. No particular reason was announced. It seems the story just ran out. And reality set in.
And reality is that all these P2P lenders are losing money from continuing operations. Now the credit cycle is ending. Default rates are ticking up. Interest rates for riskier borrowers have jumped. As credit tightens, loans can’t be rolled over that easily. Liquidity dries up. And for lenders, there will be losses. But no one knows how these P2P lenders that lose money even in good times are going to make it through hard times.
This was known a year ago. Back then, it didn’t matter because what mattered was the story, which was that they’d revolutionize the banking industry, and that they didn’t need to make money in good times. Now investors are nervously glancing at reality.
Other “story stocks” outside tech that used to soar for years on a wing and a prayer with few sales and huge losses are crashing too.
A favorite “story stock” was Cheniere Energy. It borrowed billions, first to build LNG import terminals for the moment when the US would run out of natural gas, and when the fracking revolution produced a natural gas glut, it borrowed billions to build export terminals. Now that it’s ready export LNG, the story is over and reality starts. And reality is that it has $10 billion in long-term debt and practically no sales. This was known years ago, but it didn’t matter until recently. Its shares have plunged 60% off their 52-week high.
This has happened to hundreds of “story stocks.” When they crash, though reality hasn’t changed much, that’s a sign the market has changed, that investors are beginning to glance at reality, and it mucks up the rosy story. And that’s a sign that the huge stock market boom that flourished to ever higher highs during the tough economic times of the past seven years is kaput.
The end of the credit cycle has set in. With defaults rising and credit tightening, Standard & Poor’s suddenly sees the worst drop in the “net outlook bias” since the Financial Crisis. Read… OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time