Signs are now all over Silicon Valley and San Francisco.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
OK, here’s a sobering thought. Some of the biggest IPOs in 2019 trade at record lows and all of the biggest IPOs have seen their shares plunge from their peaks. All of these companies have growing revenues but huge losses that in many cases are growing faster than revenues. But they still sport gigantic market valuations, meaning that there is a lot more money sitting there waiting to go down the drain.
And this is now sending tremors through housing markets and office markets in Silicon Valley, San Francisco, and other places that are hot spots for big startups.
The latest was Peloton, the high-end exercise bike maker. Its IPO price was $29. The IPO price is the price at which institutional investors are buying the shares directly from the company and from prior investors and from insiders. This is when the company raises money from those IPO investors. The next day, these institutional investors start selling those shares in the market, which is when those shares start trading publicly.
So Peloton’s IPO price was $29 on Wednesday. On Thursday, the shares started trading at $27, then dropped further. On Friday, shares closed at $25.24, down 13% from the IPO price.
The company reported $915 million in sales in its last fiscal year, up 110%, from a year earlier, but its loss soared by 400% to $246 million. On the principle: the more it sells, the more it loses, which has been a common thread among the 2019 vintage of IPOs. But Peloton’s market cap is still $7 billion – a stunning amount for an exercise-bike maker whose losses are ballooning faster than its sales.
Dynatrace, a software company, went public at the beginning of August, at an IPO price of $16 a share. Shares soared 62% the first day, to over $26, and then swooned. On Friday, shares closed at around $19, down 31% from the peak, and market cap fell by about $2 billion to $5 billion.
Slack Technologies, a software company, went public in June at $26 a share, via a direct listing, like Spotify had done. First day of trading, the shares jumped 60% to $42 intraday, but have plunged since then by nearly half to $22 a share on Friday. Market cap is still $12 billion, but that’s down from $21 billion on June 20.
Crowdstrike, a cyber security company, went public at $34 in June. Shares skyrocketed to $100 in August, but have since collapsed by 46% to $53 a share. Market cap is still $12 billion, but that’s down by nearly half from $23 billion at the peak.
Chewy, which was bought by troubled PetSmart in 2017, went public in June at an IPO price of $22 a share, then soared to $39 in early trading. On Friday, shares closed at a new low of $26 a share. That’s down 33% from its first day peak. But it’s market cap is still $10 billion.
In May, there was the Uber IPO. Seeing what had happened to Lyft, Uber slashed its IPO price to $45 a share, which still extracted $8 billion from new investors that have since rued the day. On Friday, shares closed at a new low, of $30 and a few cents, down 33% from its IPO price.
Big bucks too: at the IPO price, Uber was valued at $82 billion. Now its market cap is at $51 billion. $31 billion gone up in smoke. Uber has been dogged by gigantic losses, including a $5-billion net loss in the last quarter. There have already been waves of layoffs as the company is trying to come to grips with its ballooning expenses.
Pinterest went public in April. This IPO was held up as the successful one. From the IPO price of $19, shares rose to a peak of $36 in August. But by Friday, shares had fallen 27% from the peak. About $5 billion in market cap has gone up in smoke, now down to a still huge $14 billion.
Zoom Video Communications – it’s into video conferencing – is another successful IPO that is losing altitude rapidly. It went public in April at $36 a share, started trading at $65 a share, and in June made it to over $100 a share. But since then shares have fallen 25%, shaving $7 billion off its market cap, now at $20 billion.
PagerDuty, a cloud computing company for businesses, went public at an IPO price of $24. Shares closed at $38 the first day, hit $57 in June but have since plunged 51% to $28. Since June, market cap was cut in half, to $2 billion.
Lyft went public in March at an IPO Price of $72 and instantly popped to $88, which gave it a market cap of $26 billion, and then plunged. On Friday, it closed at a new low of $41 and change, down 53% from its peak on the first trading day. About $13 billion in market cap have vanished since the first-day pop. And it’s losing dizzying amounts of money.
Then there’s the biggest IPO that didn’t happen: The WeWork IPO got scuttled because the company went into a sudden horrific downward spiral, after having been “valued” at $47 billion behind closed doors by a handful of people, driven by Softbank’s global money. Softbank has plowed $10 billion into WeWork.
WeWork is now in survival mode. It got rid of its CEO and the new folks are busy cleaning house, including thousands of layoffs and halting all new office leases. This is the end of growth for WeWork. It got downgraded deeper into junk. Its bonds have plunged in price. And landlords are unlikely to sign new leases with the company. So any thoughts of an IPO are off the table.
After this massacre of share prices of newly public companies, and the WeWork fiasco, the biggest remaining unicorns have delayed their IPOs, waiting for the greener grass to eventually sprout somewhere.
Airbnb said that would delay its IPO until at least next year.
Palantir, which does big data mining for surveillance purposes for the Intelligence Community, law enforcement, and corporate customers, thinks it can continue to raise new money from private investors to fund its huge losses so that it doesn’t have to go public for years. It’s valued at $20 billion.
JUUL, the vaping company, into which cigarette maker Altria plowed $13 billion in December last year, is in collapse mode, given the allegations of having marketed its products to high-schoolers and middle-schoolers and having created an epidemic of vaping among teens.
According to the CDC, there are now 805 confirmed and probable cases of vaping-related lung injury and 12 deaths. It expects that number to rise.
JUUL was valued at $38 billion at its last round of funding, when Altria plowed $13 billion into it. By now, any IPO hopes got vaped.
And this IPO massacre is starting to show up in the spots that uniquely depend on this moolah – though most places in the US, and the overall US economy, might not even feel the tremors.
But here in Silicon Valley and San Francisco, the tremors are real. And they’ve started to show up in the numbers.
In house prices, for example. In the San Francisco Bay Area, which encompasses nine counties and includes Silicon Valley and San Francisco but also the East Bay and the North Bay, the median house price in August was down from August last year. It was the fifth month in a row of year-over-year price declines – a phenomenon we haven’t seen since the Housing Bust.
So far, this has been a very gentle decline with ups and downs, compared to what happened in late 2007 through 2011. Today, it’s an entirely different scenario for now.
The Nasdaq is still near record highs. This is a biggie: San Francisco and Silicon Valley are tightly linked to the Nasdaq. But at 7,939 on Friday, the Nasdaq is down a tad from September 2018. It dropped about 20% late last year, and has since recovered, but despite these gyrations it has gone essentially nowhere in 12 months.
Venture Capital firms are still funding companies on a daily basis, though the exit doors are now more difficult to get through. The Chinese investors are gone, both in real estate and in tech. Smaller-scale layoffs have been happening: Uber, Nio, Schwab, Huawei, Paypal, Oracle, SAP.
Companies are still hiring, but those layoffs are signs that companies are getting more circumspect.
Everyone around here who has been through this before is preparing for a local downturn.
John McNellis, a commercial real estate developer in Palo Alto, shared, as he says, his “loafers-on-the-ground glimpse” of Silicon Valley. In his essay, he cites a mortgage broker:
“The Valley’s for-sale housing market has seized up, its volume way off from what it was in the spring. Why? ‘The Chinese are gone, and the investors are sitting on their hands. They smell blood in the water, sure prices are coming way down. The only ones buying are people who actually need a house.’”
In other words, speculation has gone out of the market. The deeply troubling phrase, “The only ones buying are people who actually need a house” – means that the housing market has returned to some sort of normal. And McNellis adds: “Ruing a normal housing market is laughable, but it hasn’t been seen in Palo Alto since 2009.”
He cites a high-end residential sales broker who said, “The market just disappeared the last sixty days. We’re in a mini-recession.” The broker thought, however, the market would return in the spring.
McNellis cites two project managers of new large-scale apartment projects. Both admitted they were only achieving their pro-forma rents by giving away significant free rent on signing.
And McNellis adds, “I can tell you first-hand that our office leasing market has cooled.”
WeWork, which has come to dominate the office market in major cities, is sending tremors through commercial real estate.
Softbank, which plowed tens of billions of dollars into some of the companies I mentioned earlier, including Uber and WeWork, is a wildcard for the Bay Area.
A major problem at Softbank would really spook some folks here. Softbank has been a huge force in Silicon Valley and San Francisco in “inflating everything,” as I like to say. It has brought in an enormous amount of international money, and more money has ridden in on its coattails.
WeWork is headquartered in New York City. But repercussions of a WeWork problem will be felt more in Silicon Valley and San Francisco than in New York City via the Softbank connection. The money flow into the area via startups would just dry up.
Startups spend this international money locally, they hire locally, pay high salaries to locals, and lease fancy offices, and buy furniture and equipment, and local craft beer. And their employees rent or buy housing in the area. This has driven the market into frenzy for years. But the hot air is now coming out.
A Bay Area downturn could be an isolated thing, not impacting the overall US economy in a big way at least at first. If the Bay Area downturn becomes a California downturn, including Southern California, it would get more serious nationally. Meanwhile, we’re just here watching this unfold ever so gradually, in tiny baby steps. But it’s starting to form a real scenario.
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