This is a Warning Sign for Stocks

IPOs collapse to near-crisis levels even as stocks hover at record

It happens all the time now: On Monday, Salesforce, after trying to buy LinkedIn but getting outbid by Microsoft, bought the San Francisco startup Quip Inc., which has “about 40 people,” as the company says. Quip’s product is what it calls a “productivity platform for teams that allows them to be more connected, more collaborative and get more work done,” or what TechCrunch calls “a cloud-based word processing app.”

Quip was founded in 2012 by Bret Taylor (co-creator of Google Maps, CTO of Facebook, “responsible for the like button,” and now on the board of Twitter) and Kevin Gibbs (“led engineering and product at Google and brought Google’s App Engine to market”).

Given this sort of pedigree, Quip had VCs and other investors standing in line, wagging money: It raised $15 million in July 2013 and $30 million in October 2015. Among these investors was Salesforce Ventures.

Salesforce is now paying a ton of money for the rest of Quip. TechCrunch: “We understand from two sources very close to the deal that the total price is $750 million.”

This includes $582 million in Salesforce stock, plus the undisclosed current value of the investment Salesforce had made in Quip previously.

Quip will be the 9th company Salesforce has acquired over the past 12 months, according to CrunchBase, and the 41st since 2006!

They’re all doing it – publicly traded companies with inflated stock prices and a relentless passion for overpaying because they can: they use their inflated shares as currency of which they can print an endless number; and they use acquisition accounting to convert real expenses into “non-cash charges” that everyone is going to ignore.

Compared to some of the crazy deals a couple of years ago, $750 million for a company with “about 40 people” and an app sounds almost reasonable.

But as this corporate buying spree of startups continues, the IPO market has fizzled.

There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015, according to Dealogic. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009.

Lest we forget, 2015 had already been a down year: Compared to the same in period 2014, the number of deals and the amount raised have both plunged by about 70%.

Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology.

Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.

This year’s crop of IPOs has gained 16.7% on average, according to the Wall Street Journal, while the S&P 500 gained 6.2%. But in the first few weeks and months after an IPO, when hype rules and GAAP-based information is scare, Wall Street’s concerted efforts can drive shares to huge gains that later evaporate.

So over a two-year time frame, many IPOs haven’t fared well. The Renaissance US IPO Index, which tracks newly public companies for two years and imposes a 10% cap on the largest holdings (Alibaba, Citizens Financial, Synchrony Financial, Mobileye, and Axalta Coating), is down 3% year-to-date. It peaked in April 2015 and has since plunged 19%. For the past 12 months it’s down 16%.

Here’s the conundrum: a booming IPO market and a booming stock market go together. This is the period when the “IPO window” should be wide open, when just about anything would fly, when investors don’t pay attention and just count on the short-term IPO bounce. It’s when they’re ripe for the picking.

But this time, the S&P 500 has been breaking record after record, and valuations are by many measures silly. Yet IPOs have plunged to near-crisis levels.

This is another one of these out-of-sync movements that show that some underlying dynamics are seriously broken even while stocks keep floating higher despite quarter after quarter of declining revenues and earnings. These out-of-sync movements have become symptomatic for our era of central-bank market manipulations, zero- and negative-interest-rate policies, QE, and relentless financial repression: stock valuations have been surgically removed from economic reality, but other measures, such as IPOs, are once again sinking into that bog.

The same principle is now at work in riskier bonds, and that’s a warning sign. Even as US stock markets are at record highs, junk bond issuance has plunged at a breath-taking pace and the default rate is spiking. Read…  Junk Bond Issuance Collapses in the US and Europe

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  31 comments for “This is a Warning Sign for Stocks

  1. Dave says:

    IPOs aren’t going up because the Central Banks aren’t buying IPOs. If the Fed started buying them that would fix the problem.

    • alexaisback says:

      Wolf a little help here.

      I quickly looked at Saleforce financials – net profit/income = none a loss loss loss
      except last quarter announced net profit

      but it only looks like the net profit is based on a considerably
      extremely reduced income tax paid. Seems they always paid taxes before but last quarter in fact got a credit.

      What say you – it does not look like they make any money
      – it is a roll up with constant acquisition – yet carries a 54 B market cap. Amazing.

      . And Wow do they issue stock – I cannot help but think shareholders will be punished hard by this one, new stuff comes along every day it seems these guys will over pay for any new shiny object whether or not profit is involved.

      • Wolf Richter says:

        It sure knows how to create red ink year after year (under GAAP). It’s one of those companies that has bamboozled investors into thinking that it doesn’t need make a profit, that in fact profit is sort of toxic, to be stayed away from as far as possible.

        I guess the executives sit around during their meetings and say things like this: “I wouldn’t touch profit with a ten-foot pole.”

        As long as investors think that’s cool, companies like Salesforce are going to do it – because they can. They have access to cheap new capital (equity and debt) and they can keep blowing it for a long time.

  2. michael says:

    This collapse is much like a slow elevator. I keep pressing the call button but its no where in sight. How about a few nice tech company implosions?

    • Bookdoc says:

      I have a feeling there will be some soon as money is drying up and investors are starting to look for profit from their investment. I don’t remember which economist is credited for saying it, but a thing which cannot go on forever, will not go on forever. Compared to all other business parens, the stock market’s rise is just sheeple gambling on which stock the brokers want to make money on or computers playing their silly games.

      • Smingles says:

        ” I don’t remember which economist is credited for saying it, but a thing which cannot go on forever, will not go on forever.”

        On the other hand, “the market can stay irrational longer than you can stay solvent.”

  3. Petunia says:

    If you are not scared off by the fact that a company like Microsoft, which writes operating system software can’t create a site to match job posters and job seekers, you deserve what’s coming, dot com bust 2.0. Salesforce can’t write a “cloud bases wordprocessing app” either. What do people in these companies do all day?

    These tech companies are gobbling each other up to grow and can no longer innovate, why? Can it be that all those H1B visa holders are not so great after all.

  4. Vespa P200E says:

    IPO market and the VC/PE money dried up pretty quickly in late 2008. I was working for a start-up biotech company and the VCs turned their back when the BoD asked for some additional funding. VCs said they too were trying to figure out which company to allowed to die. Company did get “bridge” loans from 2 PEs looking for high yield convertible debt (to future IPO – LOL) and they lost it all in a year when the company went belly up after 2nd Ph III clinical trial failed.

    BTW – this company almost did an IPO in 2006 and pulled back 2 days before the IPO date due to the CEO’s dispute with the lead underwriters over offering price because the IPO was undescribed. Tried to do another IPO in early 2008 to find out the company was blacklisted by banksters – lesson here is don’t piss off your banksters. Looked into reverse IPO of dying public company but didn’t have enough cash to pull it. Company gave back the symbol back to Nasdaq for $1.5 mil refund.

  5. Thomas Malthus says:

    Never heard of Quip. Does it have any revenue?

    THIS – is worth 750m? WTF…

    • Kreditanstalt says:

      BINGO! Never heard of it either. Must be some “niche” business-oriented thingy…but does it generate any income on a sustainable basis?

      I know there’s desperation for yield out there but the minute just one of these unicorns tripped/trips/will trip the rest will fall out of favour INSTANTLY.

      • Thomas Malthus says:

        Speaking of desperation … remember this:

        Nick D’Aloisio via TwitterNick D’Aloisio, founder of SummlyA few weeks ago, Yahoo made headlines when it acquired Summly, a startup run by a 17-year-old CEO named Nick D’Aloisio for $30 million.

        Summly is a news aggregation app.

        We thought the deal was weird.

        Here is why:

        Summly never had many users or any revenues. Yahoo is shutting the app down. Yahoo is saying the point of the deal is to have Summly’s CEO help lead the company in mobile.
        But Summly’s CEO lives in London, where he is staying to finish school
        The CEO has only promised to stay at Yahoo for the next 18 months.
        The CEO is 17-years-old. We don’t buy that he’s going to be able to lead or inspire adult Yahoo engineers and designers.
        The Summly team did not invent the core technology behind the app. It was created by SRI, which licensed the tech to Summly in exchange for equity.

        Now we’ve learned another piece of information that makes the deal stranger.

        Not only did the Summly team not invent the app’s technology, they also did not build the app. A company called Somo did. Somo is “the UK’s largest independent mobile marketing agency.” It just raised a bunch of money.

        So here is what Yahoo did: It “aqui-hired” a team of people, led by a 17-year-old living in London, that cannot claim to have invented a cool technology OR to have built a cool app. Yahoo does own the technology SRI invented for Summly, but it doesn’t own SRI, so it hasn’t acquired the team that can scale the technology for Yahoo.


        Anyway, $30 million is not a lot of money for Yahoo, and this story is getting a little old. So we’re kind of beating a dead horse. But still. What a strange acquisition.

        • Thomas Malthus says:

          Wolf… can we get some Twilight Zone music….

          Nick D’Aloisio (born November 1, 1995) is an English computer programmer and internet entrepreneur. He is best known as the inventor of Summly, which is an automatic summarization software, developed with SRI International.[1] D’Aloisio has been recognised as the youngest person to receive a round of venture capital in technology, at just 15 years of age.[2][3] As of March 2013, Summly was sold to Yahoo for a reported $30 million US dollars making him one of the youngest self-made millionaires ever.[4] D’Aloisio was awarded “Innovator of the Year” in New York City by the Wall Street Journal for his work on Summly and at Yahoo.[5] D’Aloisio was also included in TIME Magazine’s ‘Time 100’ as one of the world’s most influential teenagers,[6] as well as being profiled in their “Secrets of Genius” Publication.[7] Until October 2015, D’Aloisio led the critically acclaimed Yahoo News Digest, which launched at CES 2014 and won the 2014 Apple Design Award at WWDC for its technological and product excellence.[8] He is currently a student at Hertford College, Oxford University, where he is studying Computer Science and Philosophy. During the summer of 2015, he was also the “Entrepreneur in Residence” at Airbnb.[9][10][11]

          Idiocracy has arrived!

        • Wolf Richter says:

          Gosh, I forgot all about that deal. One of the many Yahoo head-scratchers. But now we know how that turned out for Yahoo.

        • Thomas Malthus says:

          I suppose they got a nice bump on the story that ‘the next Steve Jobs’ was employed by Yahoo…

          Which was no doubt the purpose of the exercise….

          PR seems to be everything these days…. if I were to believe the ‘news’ I’d believe that the world has stopped to play Pokemon….

        • MC says:

          Well, we may ask Marissa Meyer since now she’ll have a lot of free time on her hands and won’t have to work for food thanks to the $55 million severance package she’s receiving to clear the deck for the Verizon takeover.

        • VK says:

          Unbelievable!! I wish I had studied tech instead of finance and econ. They just throw money away…

        • Petunia says:

          Silicon Valley loves the “made in their garage” myth. The myth sells American ingenuity and youth culture. Nobody wants to hear that the product was created by a fat Puerto Rican housewife in her spare time.

    • MC says:

      Microsoft Word killer? That just made my day!

      • Thomas Malthus says:

        In the past… to get noticed you had to actually accomplish something… like maybe invent the wheel… or a steam engine…. or electricity… or an airplane.. or the assembly line…

        But now all it takes is to create a tweet – or a like — or flash your snatch … and you can be both rich and famous!

        This calls for a song…

  6. OutLookingIn says:

    Very curious? This should not be happening. Somethings up. Down?

    For the past 14 days the S&P 500 has been trapped in a very tight trading range of 2150 – 2180. Today it briefly fell below there, before climbing back into that range, marking two down days in a row since Brexit.

    For the past 17 days the VIX has traded in an equally narrow band 12 – 14 which portends a collapse in volatility. Also observed that the call to put imbalance at about $40 billion is the largest ever observed.

    Could this be the start of high volatility in the volatility index? In the same context the Nasdaq 100 which has been parabolic in it’s rise, taking the charts vertical, suffered it’s first down day of any import today.

    This situation in the markets cannot last. Its as if all the players are attempting to sit on the head of the same pin! Somethings up. BIG.

    • MC says:

      “It’s as if all the players are attempting to sit on the head of the same pin!”

      I am glad more and more people are seeing things as they truly are. Plainly put “narrowing” is coming home to roost as more and more of us pile into a shrinking pool of assets which however are becoming so expensive as to either cause second thoughts or to be outside of most people’s reach.

      • OutLookingIn says:


        Narrowing with some big bets being made, as per the huge imbalance of call put at $40 billion, the largest ever! This is a clear view of the amount of stress built up in the markets. This cannot continue due to its very nature of being very unstable.

  7. Shawn says:

    I wonder if WhatsApp, another 50 person company, would still be worth 17 billion to FB today? Oh, and inventing a ‘like’ button is just comical,

    “Bret Taylor (co-creator of Google Maps, CTO of Facebook, “responsible for the like button,””

  8. Intosh says:

    I was watching a documentary about Keynes vs Hayek. It mentions Europe had to pay a debt to the US for the reconstruction. The interest was maintained artificially low throughout so that the debt can stay manageable. That consequently inflated the stock market and led to the 1929 crash. I can’t help but think we’re in this phase again…

  9. Yancey Ward says:

    The divergence is caused by how it is easier for bigger cap companies to borrow for stock buybacks. It is the reason for the divergence between the S&P 500, and the NYSE, for example.

  10. Uncle Frank says:

    Just drink some shots. That will fix it all.

    Jose Cuervo is reportedly looking to raise up to $1 billion in the third quarter.

  11. David in Texas says:

    Speaking of Yahoo, has anyone else noticed that the company just ruined its most valuable property – Yahoo Finance?

    The old version was very useful. The new version is completely worthless.

    • VegasBob says:

      Yeah, I took one look at the new Yahoo Finance and went right back to my combination of Google Finance and CNBS.

      You are correct. The new version of Yahoo Finance is absolutely worthless.

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