IPOs Crash & Burn, Debris Hits Housing, Office Markets

Signs are now all over Silicon Valley and San Francisco.

This is the transcript from my podcast last SundayTHE 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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  94 comments for “IPOs Crash & Burn, Debris Hits Housing, Office Markets

  1. jon
    Oct 2, 2019 at 12:16 pm

    Rents and home prices are too high in southern California.
    Wondering if socal would see this down turn!

    People in SoCal think housing would never go down here as we are special!
    So far the trend supports this theory.

    • Vespa P200E
      Oct 2, 2019 at 12:36 pm

      Folks in the heady bull market appear to have short or selective memories having I live thru 1 and witnessed 1 SoCal housing market busts.

      1st was 1991-1994 when all the rage back then was “short” sale. I kept my townhouse but my wife-to-be lost her 1st house near Long Beach. We did buy a new 2.2 sq ft home in Irvine back then for $285k in 1995 which was valued at $1.4 mil last year. 2nd was 2007-2009 thanks to the subprime meltdown and liar loans given to anyone with a pulse. Was doing some work in SoCal and I swear the conversations in circles of family and work was all about rising housing and no one saw the downfall. One smart friend did sell at near peak and rented in Mission Viejo.

      Anyway I tried to time the housing market and bought in 2011 in SF East Bay and sold 3 yrs ago – lesson learned is to ride the big mo up… So yes we’re due to pullback in LA/SF areas though I think slow decline to 50% retracement to 2011/2012 lows.

    • R.W.
      Oct 2, 2019 at 1:06 pm

      I completely agree with Jon, the housing and mentality of everyone trying to sell them here makes zero sense to me.
      I have lost 4 employees moving out of state and know at least 4 families who have moved out as well.

    • Trinacria
      Oct 2, 2019 at 1:13 pm

      I am waiting for SoCaljim to give us his thoughts since he has “boots on the ground “.

      • Vespa P200E
        Oct 2, 2019 at 2:49 pm

        I’m planning to move to NV or return to WA to escape the Cali’s state income tax after my youngest leaves home for college next year. Work from home as a consultant with global clients so no need to stick around SF bay area which I think is the best place I lived but it’s amazing how much work can be done remotely nowadays.

        I think more people are considering leaving as our long-time mobile dog groomer with a successful business sold her condo and returned to MI due to housing costs. It seems like white folks are leaving in droves and Indians are scooping up houses in our hood for “cheaper” housing despite hellish I680 commutes to SillyCON valley.

        • jon
          Oct 2, 2019 at 2:53 pm

          I intend to leave SoCal in few years after my youngest leave for college.
          I can work remotely….

        • Bob Johnson
          Oct 3, 2019 at 8:17 am

          Mr. Vespa,
          Congratulations on the P200E – I imagine that most readers do not recognize the name but I also own and ride a 1981. Hope yours is in good shape.

          As a part-time southern CA resident I made the decision to move to Arizona about seven years ago – should have done it long before that. In my neighborhood in CA I walk most days on the same route and find that houses are taking much longer to sell (if at all) than they did a few years ago. Almost all the new residents seem to be Chinese, the last time it happened they were Indian. Anecdotal evidence, but I’ve seen it happen before (2008).

      • Zantetsu
        Oct 2, 2019 at 5:09 pm

        As far as I can tell he is gone. May have gotten tired of the spoofing of his account and constant ridicule of his position. It’s too bad. While I did not agree with him, the more dissenting opinions that leave, the more this becomes an echo chamber.

        • curiouscat
          Oct 2, 2019 at 7:15 pm

          It seems the average person has no idea of the huge value of a dissenting opinion.

        • Javert Chip
          Oct 2, 2019 at 8:27 pm

          There is a huge difference between an informed “dissenting opinion” vs “I get paid to make up crap out of thin air”.

          Real time, it requires some knowledge and critical thinking skills to differentiate. Retrospectively, yea, everybody is an expert who sees thru all the bovine excrement.

        • sierra7
          Oct 3, 2019 at 10:11 am

          Zantetsu:
          Good comment about “echo chamber” (sites).
          Have belonged to a book club for more than 17 years. We have come to the conclusion that the more we dislike a book or disagree we learn more from those occasions than when we all agree, “….it was a good book!”
          The reason I stay on this site is because I believe that most of the commenters are pretty good financial individuals who in many instances understand the system more than I, but, who also in many ways “disagree” with each other.
          The “Blue Bloods” of European regencies of past mostly intermarried; weakened their blood lines.
          We can’t have that happen to reasonable debate!

        • Zantetsu
          Oct 3, 2019 at 2:44 pm

          Javert Chip — so you have proof that he was “paid to make up crap out of thin air”? Or are you just making up crap out of thin air?

      • Blanket
        Oct 3, 2019 at 9:06 am

        His kool aid rations must have evaporated. As an owner and a landlord in his same area, I have been witnessing the exact opposite of what he preached. I think he had his 2016-2018 memories clouding his glasses of the now. It’s changed and as many realtors like him say, it’s cyclical. We are in the down cycle.

    • Sargento
      Oct 2, 2019 at 8:24 pm

      I believe when the next recession hits California will see an exodus of folks leaving for cheaper pastures. It’s already happening on a smaller scale but when jobs are lost who in their right mind will stay and pay $3000 in rent to live next to homeless folks. I don’t think many are considering how this option would affect both rental and for sale housing. I also believe for sale housing will decrease to prices where the mortgage is supported by the rental potential and right now that’s 30-40% lower in LA/SF single family markets.

      • Vespa P200E
        Oct 3, 2019 at 11:38 am

        Agree especially 30-40% lower as I think lows to be reached is about 50% retracement from low of 2011/12 and recent highs. Now is great time to sell and chill for next 3 yrs and buy it back I think.

        The young hip tech bros don’t mind paying exorbitant rents but once the recession hits and VC taps dry out they will face the ugly reality of boom – downturn with job losses. We the old-timers have seen and experienced it.

        Sold my house in SF east bay too early 3 yrs ago and been renting since and was surprised to read that renting is actually cheaper than owning in SF area though my napkin calculation says otherwise but it’s based on 2011 non-jumbo loan. Did look around in case our lease was not renewed and surprised to hear that anything, even low sq ft, priced around million bucks moves quickly 6 months ago.

        • Zantetsu
          Oct 3, 2019 at 2:48 pm

          I’ll be honest. I consider “tech bros” as a shorthand for referring to silicon valley developers about as insulting as the N word. It’s pejorative and for no reason. I’ve worked in silicon valley for 25 years and have yet to meet a “tech bro” and don’t really appreciate being painted with that brush.

  2. 2banana
    Oct 2, 2019 at 12:32 pm

    So, I guess I got nothing to worry about if I work for Pinterest in a WeWork office space, video conference with customers using Zoom Video, keep all company/personal data on the PagerDuty cloud, take Lyft everyday to work (don’t own a car), get my dog food from Chewy and get my exercise on a Peloton bike (financed, of course).

    But I am diversified in my investments. I own a bunch of negative yield bonds.

    :-)

    • Kent
      Oct 2, 2019 at 2:41 pm

      Softbank is going to think those negative yield bonds were a smart investment on your part.

      • Trinacria
        Oct 2, 2019 at 5:38 pm

        I was just thinking about Softbank as they seem to be up to their eyeballs in this stuff…I don’t know any details…so, will they survive what appears to be quite a “cleansing” headed our way??? Anyone have any knowledge or insight on this?

    • Ethan in NoVA
      Oct 2, 2019 at 4:07 pm

      PagerDuty isn’t a cloud storage platform, you send alerts to it from your monitoring infrastructure and then it “pages” the people on-call. It’s pretty decent, but no idea how expensive. It handles response rotation, response time tracking, on-call coverage and the like. I used it at my prior employer.

      Slack is really useful though, and I know of a number of large companies that pay for it. I think I sit on 9 slack “servers” between work, friends and hobbies.

      • Harrold
        Oct 2, 2019 at 4:59 pm

        Microsoft has a competing product called Teams.

        • c1ue
          Oct 3, 2019 at 12:58 pm

          Yes, and that’s how Slack dies.
          Microsoft and Google sell full enterprise suites: email, voip comms, cloud storage, cloud computing etc.
          Slack is a throwaway add-on for either platform.
          While there is interesting functionality as a dev control tool via APIs, that doesn’t justify the valuation.
          Slack is simply way too late in pushing for non-dev related apps for its platform – which could have served to expand the use cases.

      • Zantetsu
        Oct 2, 2019 at 5:14 pm

        Re: slack — the number of times that chat messaging has been re-invented since I was in college is just astounding. We used Zephyr campus-wide in the early 1990’s, and I have no doubt that there were decades of similar solutions before that.

      • fajensen
        Oct 3, 2019 at 2:41 am

        Damn!

        We should have IPO’ed that shift-rota web site with complimentary SMS-sending scripts that we hacked up back when I did IT.

        That was some time before Cloud took off, though, so it would fail the: “Apply technology to a trivial problem in a way that make what should be correspondingly trivial solution extremely complicated. Preferably by introducing as many globally-sourced gateways, non-controllable interfaces and external services as possible. Then make it a business- or safety- critical service”-design criteria.

    • Bobber
      Oct 2, 2019 at 7:11 pm

      What movies do you watch while your Tesla is doing 75 mph on autopilot?

  3. CreditGB
    Oct 2, 2019 at 1:02 pm

    Titanic’s trend such as it was, was perfect until just before midnight April 14, 1912.

  4. HudsonJr
    Oct 2, 2019 at 1:24 pm

    Working at a large company, I hate slack. It started off great as a replacement for large distribution groups, and more insight into what is going on across the company. There was no annoying having to add people to lists, and history is kept for future reference.

    However, as more people started to use it, it seems to have devolved into people just using it for Instant messaging. Most of the IMs are stuff that people should be finding through intranet search or searching Slack itself. Or it is stuff that should be directed at a group, but people are too afraid to deal with groups.

    I just leave DoNotDisturb on now. Even so people still break through. Yesterday someone did it because they had left on a trip without bothering to get the address/location of where they were supposed to go when they arrived. This was someone not reporting to me, but no one in their reporting structure had the info.

    I guess it’s great for the Siri and Ask Alexa crowd.

    • zoomev
      Oct 2, 2019 at 1:30 pm

      Slack and Box are perfectly usable. Nothing wrong with them.

      The issue is they are just commodity crapola.

      Reminds me of when Time Warner bought AOL. AOL being just another ISP with email. Nothing there.

      • I could've had a V8
        Oct 2, 2019 at 1:57 pm

        It was AOL that bought Time Warner.

        • wkevinw
          Oct 2, 2019 at 4:13 pm

          AOL/TimeWarner deal= one of the greatest examples of being taken of all time.

          I can’t recall what year, but the ex-CEOs of both companies appeared on CNBC together to mark an anniversary (10 yr? 20yr?).

          The TimeWarner CEO had long been one of the “visionaries” who foresaw the convergence of electronic and print media. He was right, but had no idea how to do business in a profitable way to exploit it. (so much for being a visionary)

          He opened up some kind of meditation center after he was forced out. I’m sure he needed some help finding ways to relax.

      • zoomev
        Oct 2, 2019 at 9:40 pm

        Slack seems to be a better Internet Relay Chat (IRC).

        A GUI, manage’s attachments, has some search capability.

        The company can deploy and manage enterprise level services, that are secure. Seems their biggest asset are the people that design and maintain that.

        Is that a $12billion company?

    • Vespa P200E
      Oct 2, 2019 at 2:53 pm

      1 of my client uses Slack with co-workers since the msgs self destruct or something. Talk about paranoia…

      • fajensen
        Oct 3, 2019 at 2:59 am

        You’d think. Except its all stored in ‘The Cloud’ Forever. Client is not being paranoid on a practical level.

        ‘Telegram’ is better for things that one doesn’t want to see at the inquest or when meeting with HR. Although, one will still get nailed over the existence of covert communications with co-workers (and co-workers will take screen-shots for ‘reference purposes’).

        I do my bitching over work, bosses and so on ‘The Analogue Way’, down at the boozer over drinks. That way one can plausibly deny knowledge of any of it, when a co-worker rats someone out to HR.

      • c1ue
        Oct 3, 2019 at 12:59 pm

        If it is an enterprise account – the enterprise stores all and accesses all for compliance purposes.

  5. Jon
    Oct 2, 2019 at 1:30 pm

    On a walk through downtown Seattle, I noticed two buildings with WeWork signs. I wonder how much space they leased here.

    • Frederick
      Oct 2, 2019 at 2:44 pm

      Jon I noticed the same thing in Warsaw this summer Nice new skyscrapers with WeWork signs in the windows At the time I didn’t even know what it was I sure do now

      • alex in San Jose AKA Digital Detroit
        Oct 2, 2019 at 10:38 pm

        I’ve seen WeWork, NextSpace, all kinds of work-space signs around where I am. I even remember there being one that offered free beer. So-called “maker spaces” were also work spaces, but those have never gotten off the ground here.

  6. I could've had a V8
    Oct 2, 2019 at 1:54 pm

    I don’t get why people so often treat market caps as if they were real quantities of money. They’re dollar values, but at best they’re an estimation of how much it would cost to buy all of the shares if they were all up for sale, assuming perfect elasticity of demand (which most of the time won’t be the case.)

    • Oct 2, 2019 at 2:49 pm

      “Market cap” is the price of the company, in dollars, as determined by the share price at the last trade. Everything has a price. For publicly traded companies it’s market cap. It changes, just like house prices change every time there is a transaction.

      • cas127
        Oct 2, 2019 at 4:34 pm

        WR,

        True…but…I also think that V8 has a point that is almost always overlooked.

        Namely, the fact that market cap almost always overstates the true day-to-day overall economic value/impact of a given company (absent some buyout transaction – which itself is probably subject to some financial engineering f*ckery-pokery that undercuts true transaction value).

        Stated market caps implicitly assume that (at any given moment) enough buyers can be found to immediately cough up the market per share price – and that is a mighty big assumption.

        In reality, absent some solo buyout buyer – the vast majority of companies probably face very, very finite demand at a given per share price.

        In other words, there is a very real world reason that IPO companies rarely offer up more than 20% or so of their outstanding shares at IPO.

        It is because finding the other 80% willing to pay the IPO price is a bitch and a half.

        And yet the IPO company can claim to be “worth” whatever insert-multi-billion dollar market cap they have carefully engineered (on a 20% fill/take rate).

        So I do think that “market caps” tend to systematically overstate the real world, immediately realizable value of a given company.

        It is simply too hard to *really* find that other 80% of buyers who will value the company as highly at the margin.

      • curiouscat
        Oct 2, 2019 at 7:35 pm

        Wolf – I think “I could’ve had a V8” has a point. We know how market cap is calculated, but there is a sense of unreality to it. Somehow it seems that reporting that kind of information is done for effect. So market cap drops 20 billion or gains 20 billion. That’s important to the folks who own it, but I don’t understand why it should be important to me. Am I missing something? Is that just too rarified an environment for us mortals? Mostly what happens is I get a sense of schadenfreude when I see something like Wework has lost a few billion that I never thought it should have been worth in the first place.

        • Oct 2, 2019 at 8:07 pm

          curiouscat,

          Market cap may not be important to you the investors, but here is why it matters in the overall scheme of things:

          All shares of a company are owned by some entity (person or institution). So XYZ shares were worth $20 billion yesterday. Those $20 billion were sitting in portfolios of these people. Today, XYZ crashed 50%, and market cap is suddenly $10 billion. The other $10 billion evaporated. So all people collectively that held these shares now have $10 billion less in their accounts. That $10 billion disappeared. No one got it. It’s gone.

          So if in the overall stock market, $3 trillion in market cap disappears, this is actual account value that collectively disappears from all market participants’ accounts. Collectively, they got $3 trillion less rich.

          The opposite happens when stocks rise and participants get $3 trillion richer (they then spend some of this money on cars and yachts, creating economic activity … the “wealth effect.”)

          Stock market valuation is very important to the US economy. If stocks tank 50%, we will most certainly have a big recession or worse, because over $10 trillion in wealth (market cap) just disappeared, and it impacts spending and investment by consumers and businesses.

        • Javert Chip
          Oct 2, 2019 at 9:17 pm

          curiouscat

          For a publicly traded company, “market cap” is at least related to reality: it’s the current clearing price (latest trade) times the number of shares. Caveats (generally speaking):

          1) If you wanted to sell the whole company (or lots of shares) all at once, the price would probably drop
          2) If you wanted to buy the company (or lots of shares) all at once, the price would probably increase

          For a “private” company, all bets are off. Generally the company is valued based by the last publicly disclosed significant purchase of shares (notice all the caveats in that last sentence)…and as long as it stays private, the company is not required to disclose all its funding rounds.

          EXAMPLE: if you (or SoftBank) purchased 1% of the shares for $1B, the market cap is now $100B. This is essentially what happened to WeWork, and it’s pure Alice In Wonderland
          – the market didn’t set the price for the enterprise, a few guys in a conference room set the price for 1% of the shares. This is not explicitly illegal, but done with intent to deceive, it sure smells like price manipulation.

          Example: I buy a can of Coke for $0.30/ea (12-pac price) in my local supermarket: I can also buy a can of Coke from the machine at the local zoo for $1.50. One purchase is 500% of the other, but my purchase at the Zoo doesn’t change the market cap of Coke-a-Cola Corp by 500%. SoftBank’s $1B “up value” funding round did change the published market cap of WeWork, and this is what unsophisticated retail investors usually pay attention to. This particular transaction stunk so bad, WeWork got laughed off the stage.

      • cas127
        Oct 3, 2019 at 2:11 pm

        WR,

        Commenting on your “Market Impact” response.

        I’m not really disagreeing with anything you are saying (I agree that reported marginal prices per share/market caps have a profound wealth effect on most shareholders)…but I guess that I am making the point that the over-emphasis on market cap introduces vast volatility/distortions into the economy…precisely *because* of the wealth effect impact.

        Again, finding enough real world buyers at a given share price to 100% “fill” reported multi-billion market caps is a bear and a half…as opposed to finding some one-share schm*ck willing to vastly overpay for the marginal share – which is then literally massively multiplied into a purely theoretical “market cap” that only really exists in the minds of those who don’t think about it too long.

        If all shareholders tried to sell at that over-valued marginal price…that marginal price would collapse.

        (On a related note, that is why big-holding insiders typically have lockout periods post-IPO…and why post-IPO prices frequently tank following the expiration of those lockouts…)

        I don’t disagree that reported market caps have a huge real-world impact (via wealth effects) – I am making the point that they *shouldn’t*…because the sole focus (worst in the IPO realm) on the tiny-holding marginal share buyer introduces huge volatility into the economic system (again because of the wealth effect).

        This is how bubbles get boot-strapped into existence.

        Automatically and implicitly scaling up the valuation opinion of 1 shareholder (the marginal one) thousands (or tens of thousands) of times, is almost certainly a recipe for introducing unnecessary volatility/distortions into the economic system.

        In a lot of ways, this infinitely-multiplied-marginal-buyer-monomania is the beating heart of the IPO hype machine.

        It allows insider/investment bank manipulation on the cheap.

        If insiders/IBs can round up (or impersonate) a mere 10% delusional shareholder base…they too can become a real world, publicly traded multi-billion dodecahedron-corn.

        (Usually…WeWork was simply an insanity/insult-too-far).

  7. TownNorth
    Oct 2, 2019 at 2:22 pm

    Apparently, WeWork just signed a 362,197-square-foot lease at 437 Madison Avenue, and will take occupancy in 2021. That news story is hedged with this comment, however: “If the world as we know it still exists by then.”

    • Frederick
      Oct 2, 2019 at 2:39 pm

      Good “hedge” especially after the latest economic numbers

  8. Seneca's cliff
    Oct 2, 2019 at 3:36 pm

    This will quickly effect Portland as it is basically a stepchild of the bay area. Much of our “new” economy is spillover software and app companies from the bay area. The thing I have been marveling at the last few years is when these places get written up in the local business press, it is never about how they had a great quarter and made excellent income, it is always a story about how XYZ app development company just attracted ” or was awarded” $200 million or something in new investment or loans. As the IPO market freezes up it will inevitably freeze up the easy money investment market then these hundreds of companies that have been running on “new funds” and not income will crash and burn in a spectacular fashion.

  9. lostfan4
    Oct 2, 2019 at 4:29 pm

    Nice image of the equities landscape this morning:

    https://pbs.twimg.com/media/EF4QBnlWsAcjiFw.jpg:large

  10. Tom Stone
    Oct 2, 2019 at 4:49 pm

    A shout out to Adam Neumann who sucked $740MM out of WeWork before skipping out the door with a shit eating grin on his face!

  11. Wisdom Seeker
    Oct 2, 2019 at 4:50 pm

    Wolf, I’m having trouble with the linkage between doomed IPOs and Silicon Valley here. Of the 10 IPOs you mentioned, 7 are either not based in California, or still trading above the price paid by the IPO buyers (or both)!

    Listing of “troubled” companies:
    * Peloton – based in NYC
    * Dynatrace – based in Waltham, MA
    Slack: San Francisco.
    * Crowdstrike: Silicon Valley. IPO buyers still up 50% since IPO.
    * Chewy: HQ in Florida. Investors still up over 10% since IPO.
    Uber: San Francisco. But Uber is it’s own unique train wreck.
    *Pinterest: San Francisco, but IPO buyers are still up over 10% since IPO.
    *Zoom Video: Headquartered in San Jose CA, but IPO buyers are still up over 10% since IPO. Not a disaster at this time.
    PagerDuty: San Francisco
    Lyft: San Francisco
    *WeWork: NYC

    The only ones actually impacting Silicon Valley with outright declines from their initial IPO price are Uber, Lyft and PagerDuty. Not so much.

    It’s really not unusual for IPOs to have stock price declines in the early stages. Most IPOs will trade well below offering price for a while. Many will die off within a few years. That’s really not that unusual. There’s no expectation of survival. The tickers and charts of failed IPOs are hard to find afterwards, though!

    Meanwhile, there are new startups coming up all the time as well. Most of those will fail too, but a few will succeed.

    • Wisdom Seeker
      Oct 2, 2019 at 4:55 pm

      Correction: 4 of 10 are troubled and in Bay Area. WeWork hasn’t IPO’d yet, but also isn’t in Bay Area.

      Slack and PagerDuty employ under 2500 people combined, so they are much smaller than Lyft and Uber.

      • Javert Chip
        Oct 2, 2019 at 10:05 pm

        Wisdom Seeker

        You’ve listed 10 companies and discussed them as if they were all equal. That ignores the HUGE elephant in the room – Uber.

        Uber is has more employees (all requiring housing) than all the rest put together (22,000 real employees; 3M drivers), and it’s in mega-trouble, burning more money (!Q $5+ loss) then all the rest put together. The 4 you point out with stock above the IPO price are all still losing money (Zoom is about break-even).

        FYI employee count: Pinterest 1,600, CrowdStrike 1,600, Lyft 4,750, Chewy 9,850, Peloton 400, Dynatrace 2,000, Zoom 2,000, PagerDuty 550, Slack 1,700.

        • Wisdom Seeker
          Oct 2, 2019 at 11:03 pm

          But Uber’s employees are all over the world. The demise of Uber isn’t imminent, but if/when it happens it won’t have a massive local effect anywhere, really.

        • Javert Chip
          Oct 3, 2019 at 2:57 pm

          WS

          Uber reporting shows 11,400 of its 22,250 employee are in the US (presumably primarily Bay Area).

          Uber just simply isn’t a “high-value technology platform”; Uber actually operates several pretty grungy low-margin businesses (Uber rides, Uber Eats, Uber matching part-time employees to employers, etc).

          However, Uber rides does provide some value: you can get a car when & where you want it without the local taxi union & taxi commission & politicians controlling your fate. That is worth something, but not today’s market cap of $50B (which was $80B just 90 days ago).

          Even if Uber makes their business model profitable, the novelty is wearing off and I’d expect the market cap to continue to shrink.

    • Alex
      Oct 2, 2019 at 5:45 pm

      I think it’s relevant because there are are a lot of SV companies that expect (with near certainty) to be the next Uber, etc. When that sentiment changes, it’s going to be bad.
      I was just back in the valley last weekend, seemed to be a TON of open houses going on.

      • Frederick
        Oct 3, 2019 at 4:38 am

        Gotta get them sold before everything tanks God help the poor Schmuck who buys now

    • Vespa P200E
      Oct 2, 2019 at 6:57 pm

      They may not domicile in SV but these money losing “unicorns” are either associated with including VCs in the valley or part of the greater SillyCON Valley that fooled a lot of investors, pro and amateur.

    • Oct 2, 2019 at 8:38 pm

      Wisdom Seeker,

      As I mentioned in the article, the WeWork linkage to the Bay Area is via Softbank, which has a $10 billion investment in it. Softbank is incredibly important in the Bay Area. If Softbank has a problem and cuts back funding, it has a massive impact here locally.

      The IPOs listed were icons of what is going on in the overall startup scene. It’s a sea change. The exit doors are getting tougher to get through. If the exit is barred, investors get leery of making new investments because they don’t know if they’re going to get out, or if they’re going to become the end-user of those shares or convertible notes.

      • JZ
        Oct 2, 2019 at 9:28 pm

        I have my doubts. US print paper to buy Saudi oil. Then US do zero interest rate. Saudi hold the paper and find no place to put. So Saudi give the paper to SoftBank, which then find all these Uber and WeWorks. Let’s assume no more IPO, Fed do ZIRP again, where do Saudi dump the paper? They can’t dump paper into gold, you know, MBS will get phone calls. So where would Saudi dump USD?

        • Javert Chip
          Oct 2, 2019 at 10:13 pm

          a) US imports of Saudi oil are down 75% over past 10-15 years (to under 400,000/day)

          b) US has never done ZIRP

          c) In 1970s, “petro-dollars” were recycled into US treasuries; still beats investing in yuan.

        • JZ
          Oct 2, 2019 at 10:46 pm

          Let’s just troll. If holding USD and UST is so attractive, then why would Saudi dump them into SiliCon Valley? Is that because Uber and WeWork so good or holding UST and USD is so bad?
          There Is No Alternative….

        • JZ
          Oct 2, 2019 at 11:13 pm

          So US is buying less and less oil from Saudi, but US still go to Saudi and put on a smile asking Saudi to only take USD no matter who buys oil from Saudi, or else….
          Then US prints to buy stuff from all over the world through trade deficit and all of the world bring the USD to Saudi to get oil.
          US has the responsibility to print and buy, other wise the world trade and world energy won’t run!
          So what should Saudi do with USD? UST yielding 1.7%?
          I highly suspect the same people putting a smiley face to ask Saudi to only take USD for oil has also asked Saudi to stay out of S&P, and…. fund more SiliCon Valley.
          It is all speculation, but the question remains…. what would Saudi do with USD? what is Saudi ALLOWED to do with USD?

        • Frederick
          Oct 3, 2019 at 4:41 am

          JZ the point is that’s changing faster now I read somewhere that Saudi is thinking of selling oil in Chinese Yuan Not sureif it’s true but seems like that could happen

        • DebtWazoo
          Oct 3, 2019 at 1:34 pm

          > They can’t dump paper into gold, you know

          why not?

        • JZ
          Oct 3, 2019 at 2:04 pm

          For the same reason Saudi can NOT take any other currency or gold for oil payment. Or they won’t be “protected”. If you think gold is good, the sad truth is that gold will melt in front of guns. Everything will melt in front of guns, including guns. The Japanese melted in 1990 by walking into Plaza and appreciate their Yen for the same reason.

    • c1ue
      Oct 3, 2019 at 1:02 pm

      The companies may or may not be based in Silicon Valley, but I suspect the majority of VCs funding them are.
      And failures – much less lack of resounding success – in IPOs means less money for new startups.
      The companies themselves aren’t the issue – it is what they represent in terms of investor willingness to cough up funding for the next generation.

  12. Michael Engel
    Oct 2, 2019 at 4:58 pm

    SPX on Jan 2018 peak.

  13. Lakers Fan
    Oct 2, 2019 at 5:56 pm

    It all sounds bleak Wolf. On a brighter note, but possibly in the same story-line as your article, I found my broker just eliminated most of my trading fees.

    Can you perhaps consider an article in the future that covers why ( and why now), all the brokerages are eliminating most trading fees? How can they stay in business?

    Is trading by the layman dying as it’s all corporate buybacks now?

    • Oct 2, 2019 at 8:29 pm

      Lakers Fan,

      I hope you don’t own shares of your broker because brokers got crushed over the past two days.

      Unless you day-trade, or trade a lot, eliminating already low brokerage fees makes really not a lot of difference for regular retail investors. For each $100,000 in your portfolio, and 10 trades a year, you saved $50 a year. But over the past 2 days, each $100,000 of your portfolio is down $3,000.

      If you have a financial advisor that charges you 2% on assets under management, your annual cost is $2,000 per $100,000.

      You see, it’s a huge deal for brokerage firms that just lost a revenue source. But for regular retail investors, it’s not important in the overall scheme of things. I’ve been with Schwab for decades; and a few years ago, I also opened a TD Ameritrade account, and now have both. As far as I’m concerned, trading fees have been so low for so long that they have not had any impact on my decisions.

      However, it’s a different story for day traders. But they usually already had very low-fee accounts.

      Brokerages make a lot of money in other ways, including financial advisory fees and other fees. There is also cash sitting in your account that they can lend out to others (margin, etc.), and they charge high interest rates on margin balances, which is a big source of revenues. They only lost one source of revenues, and they’re going to figure out how to replace it with something else.

      • California Bob
        Oct 2, 2019 at 8:37 pm

        Just got an email from TD Ameritrade; they’ve eliminated all trading fees. What a coincidence!

        Curiously, my mail server put it in the spam folder (but it appears legit).

      • Javert Chip
        Oct 2, 2019 at 10:15 pm

        I’d guess a round of consolidation is in order…

    • akiddy111
      Oct 3, 2019 at 12:35 am

      Interactive brokers charge a dollar per trade. They have a very informative and intuitive platform that can be easily customized to your own preferences. I love it. Also, their margin interest rates are very competitive but i would caution against ever using margin.

      I bought some AMTD yesterday at 25% off and I’m down 3% on the trade today. So much for 23 years of trading experience. No worries. I spent half my adult life hanging around falling knives. It’ll all be good.

      I use TD as one of my accounts and their client service is always fantastic.

    • fajensen
      Oct 3, 2019 at 3:38 am

      By getting in front of their customers. They ‘pool’ the individual investors shares / bonds and whatnot into exchange-registered securities accounts that they own, from that pool they assign the shares / bonds / so on to the customers accounts as an accounting exercise. Customers will not normally be aware of this happening because retail investors don’t read all the small stuff.

      The result is that now the broker doesn’t have to go via the exchange for most trades, they can settle internally, using only ‘accounting entries’, which are of course very cheap to do with software.

      The other thing is that now that the broker has registered an enormous stash of securities – Assets – they can go and play their own games with it, even borrow against ‘their portfolio’.

      This was a surprise to the ‘sophisticated’ investors in ‘MF-Global’ (who also didn’t read those small letters) and maybe in the future there will be a surprise to the ‘Nordnet’ clients, that their investments are not actually registered in their name but ‘Nordnet’s'(*).

      I use ‘Nordnet’ because it is one of the largest ‘no-fee’ brokers, but all of the ‘no-fee’ brokers I have checked out use this ‘Pooling’-scheme. Which means I don’t use them.

      In addition, the broker can always take ‘theirs’ the classic way: Out of the buy/sell spread they will make you pay.

      *) The Swedish securities laws concerning the ‘pooling’ are ‘very Swedish’ in that there is always some stated condition where one can follow the law and yet still screw investors in a way that ‘wasn’t intended (Ha!)’, for example:

      If Nordnet owns securities that are somehow placed in the same pool as their customers, even 100 shares, all of the customers shares becomes part of the liquidation proceedings in the case of bankruptcy!

      Whereas, if one had made the very minuscule effort of registering ones own securities account, ones assets are not entangled with the bank / broker going bust even if one is trading the account via a bank /broker.

      This setup costs more, about 5 EUR per trade. In my opinion, this is just what it always costs, difference is that the price I pay is visible (and tax deductible).

    • Oct 3, 2019 at 9:36 am

      They make it up by front running you with algorithms. On the other hand they are hoping to bring a few buyers into this market, and perhaps some itinerant daytraders, which might help provide liquidity (if that becomes an issue, can’t imagine how?) They have always used the clients money to trade against the client, always.

      • Javert Chip
        Oct 3, 2019 at 3:05 pm

        Exactly how does Schwab trade against the client?

  14. David Hall
    Oct 2, 2019 at 5:59 pm

    My barber had to sell his airport limo business because of Uber. Ride sharing businesses are a good idea, if they can be made profitable at a reasonable price.

    • Vespa P200E
      Oct 2, 2019 at 7:01 pm

      My fave Lincoln Towncar driver was forced out of the business thanks to Uber as well. He survived the Uber Black but regular Uber did him in…

  15. DR DOOM
    Oct 2, 2019 at 7:33 pm

    This is a small start on solving homelessness and lack of household formation due to asset inflation. Wolf, I hope you get a nicer looking Transformer/pole to look at and your rent cut in half.

  16. Cyclops
    Oct 2, 2019 at 8:06 pm

    Besides the Dot.com crash, unicorn crash seems to be picking up speed with large Cap leading the overpriced pack!

    While eyes were watching Repo 75 billion shortfall in reserve funding on A daily basis last week!

    Rumors that J P Morgan bank was using two third of Repo!
    I love to know the true story about JPM! Otherwise backup F-250 with more VIX calls!

  17. Keepcalmeverythingisfine
    Oct 2, 2019 at 9:07 pm

    I was front and center in the valley during the dot com crash. At first it started slow, a few IPO’s getting shelved, the ones that made it through IPO were losing value, a little each week. But we were all sure it was just a few companies struggling and there were far more doing well. We thought our technology and company were better than those and we would be fine. And then a few months later the bottom fell out. A year later and the valley emptied out. It was so quiet, just empty. It feels like the early innings again of another tech wreck. I hate to say it. It is awful to go through. Your career is severely affected.

    • Vespa P200E
      Oct 2, 2019 at 9:44 pm

      Yep I saw it too. You are spot on with things getting progressively worse and the bottom fell out around 2002. Most of the SV players back then were hardware and chip related and budding internet companies and 20 yrs later it’s mostly software with some chips and social media darlings that really do not add much but time wasters and these young tech bros ain’t seen nothing, yet.

      Redmond WA was not as impacted by dot com crash and the following 2 ugly years that brought pains to SV. Will not forget the cab driver who picked me up from SJ airport in 2002 who had lost job as a hardware engineer.

      • Darren
        Oct 2, 2019 at 10:01 pm

        I also recall this time frame,.I would go outside for a smoke break in Redwood City, and it would not be uncommon to see tow trucks showing up to repossess Porsche’s, and other luxury sports vehicles fairly regularly, usually in the morning while their owners were getting let go. My firm went from 30 plus technical engineers down to 2. The company actually had the audacity to have a potluck Xmas party, as they couldn’t afford to pay for one, so get this,.to our dismay, the executive flys up from LA and buys some Chinese food from a nearby Safeway as his potluck item to contribute, even though the very plane ticket was 300.00 bucks that could have gone to pay for some food for his employees. What a Jackass, couldn’t F—-int believe it..

        • Vespa P200E
          Oct 3, 2019 at 10:12 am

          Indeed as I think many of these young tech bros in SF/SV are in for some rude awakenings. They’ve been “spoiled” with a smug attitude feeling invincible and too young to experience the 2000-2002 downturn in the tech industry and 2007-2009 were kinda mild. The amount of money down poured to SV VCs spawned so many I think worthless money bleeding start-ups that it may get pretty ugly.

          I worked for a start-up biotech company that pulled IPO 2 days before trade due to dispute with underwriters on pricing (over $2/share). Anyway tried to do IPO again only to find that the company was black-listed. Considered reverse merger and tried to get some bridge financing in 2008 but the seemingly high liquidity DRIED up with VCs trying to make calls on which start-up to starve to death. I think the same scenario will play out again sooner than later as it’s amazing how liquidity tap can dry out all of sudden.

          And it really sucks to get fired and paranoia before the lay-off, and these young tech bros will be humbled…

    • DebtWazoo
      Oct 3, 2019 at 1:44 pm

      > It was so quiet, just empty.

      I remember this.

      Around 2002-2004 I was working half-time for a university and doing contract programming the rest of the week. I remember meeting a client (mid-sized peninsula software company) in an enormous cubicle farm, must’ve been 500 desks. We were the only two people in the cavernous room, middle of the afternoon on a weekday. Surreal.

  18. raxadian
    Oct 2, 2019 at 10:04 pm

    The Great Unicorn Massacre of 2019? Or maybe they will truly die next year?

    Wolf you can probably earn money with a book or conference that explains why the hell there are people and companies that invest in money burning companies.

  19. Jack
    Oct 3, 2019 at 12:01 am

    señor Wolf,

    I think the time is ripe now to do a dedicated article on “ Softbank “, and delving into its DNA in detail.

    A bit of further analysis ( your type of analysis) of it’s so called ( vision fund 1 and vision fund 2) .

    The necessity of this will be evident in the market soon.

    It will be also great if you look into the recent operations of deutsche bank , these two birds are going to mean much in the next year or so.

    I would enjoy reading the contributions to these particular works ( if it materialize) .

    Many thanks to everyone that share their thoughts here.

  20. ft
    Oct 3, 2019 at 12:45 am

    There are two companies in Silicon Valley that seem to do very well, especially during down times. They have facilities on nearly every street. One is called “Available” and the other is called “For Lease”.

  21. Oct 3, 2019 at 9:56 am

    There was this discussion before, on repurposing mall property, isn’t WeWork in that line? Firing the CEO is usually good for the stock price. Many of these IPOs have a similar MO, modified vulture capital? Zillow consolidates house renovation, Uber consolidates the taxi business. There are synergies out there. I love JUUL, vaping is the future of medication, like Peloton, and high tech exercise. Throwing money (there is too much of it anyway) at these companies hardly seems like more of a problem than tossing money at conspicuous consumption while half the world starves. This is more intelligent than the dotcom bubble, I don’t think the internet was ever the answer to anything, and the plethora of ads on this site serve by example.

    • c1ue
      Oct 3, 2019 at 1:03 pm

      Vaping is the future – assuming vaping doesn’t actually cause health problems.
      And I don’t mean exploding vaping machines, either.

  22. DebtWazoo
    Oct 3, 2019 at 1:05 pm

    bring it.

    Bring It.

    BRING IT ON!!!!

  23. ALWAYS TANKIE
    Oct 3, 2019 at 3:18 pm

    How does Peloton have a market cap 7x something like fitbit which has 2x the revenue.

  24. John T
    Oct 7, 2019 at 2:56 pm

    If the California housing market crashes I would consider buying. I make good money but don’t want to spend that much money on a mortgage. Instead, I live with my in-laws for free. The timing solely depends on when the crash happens. I can wait. Two years, a decade or two :) can’t beat living rent/mortgage free, can you?

  25. RC
    Oct 7, 2019 at 5:37 pm

    But why IPO will have impact on housing market?

    Most of these companies have 1000-2000 employees. Only Uber is much bigger, but I would still estimate it’s headcount at ~7K employees in BA.
    Amazon also has 7K employees in BA and such behemoths as Google, Apple and Facebook have tens of thousands. Apple reportedly had 5K open positions this summer mostly in BA.

    What could really affect the market is the stock prices. Compensation in large tech companies is 50%+ stocks. So 10% decline of DJ will make much more effect than failed IPOs.
    Housing around Google or Facebook campuses is unaffordable even for most Google/Facebook employees. Unless there are 2 tech workers in a family, the one needs to sell stocks to pay the mortgage on 1.5M+ homes. Either a downtick in stock prices or an uptick in mortgage rates could make the market to go down.

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