Dotcom bust all over again, but bigger after 13 years of money printing.
By Wolf Richter for WOLF STREET.
Only 8 IPOs started trading in April, after 2 IPOs and March, and 8 each in January and February, down from the 24 to 43 range a year ago, and down from 61 at the peak in June, according to data from Renaissance Capital:
Of the four IPOs that started trading last week, one of them has kathoomphed 92% from the pop-peak, and another by 51%. “Two more micro-caps popped upwards of 350%, before dropping later in the week – by now a familiar pattern,” said Renaissance Capital in a note sent out to subscribers over the weekend.
Ostin Technology [OST], a Chinese company, started trading on Wednesday on the Nasdaq with a spectacularly artificial pop from the IPO price of $4 a share to $40 at the end of the day, and on Thursday continued the spectacularly artificial pop to $47.97 a share, but then kathoomphed 92% by Friday evening, to $3.72.
Belite Bio [BLTE], a Chinese biotech, set the IPO price of $6 a share. On Friday, its American Depositary Receipts (ADR) started trading at 13.95 and made it up $17.50 by midday for a nicely artificial “pop,” and then kathoomphed 51% from the pop-peak, to $9.50 by the end of the day.
The Renaissance Capital IPO ETF [IPO] has plunged 53.8% since February 2021. It tracks major stocks that went public roughly over the past two years before they’re gradually being faded out from the index. Its largest 10 holdings currently:
- Uber [UBER]
- Snowflake [SNOW]
- CrowdStrike [CRWD]
- Datadog [DDOG]
- Cloudflare [NET]
- Airbnb Inc. [ABNB]
- Zoom Video [ZM]
- Palantir [PLTR]
- Coinbase [COIN]
- com Holdings [BILL]
IPOs are one of the exit strategies for early investors, from angel investors and venture capital (VC) firms to Softbank. And that exit is now getting barricaded by investors as they are losing interest in regularly getting thackamuffled by these shares sometime after the IPO, a process that started in February last year, and some of which I tracked in my Imploded Stocks column.
And there is now a lot of navel-gazing going on in the startup industry because this is dotcom bust all over again, only bigger and broader.
Bill Gurley, a general partner at the Silicon Valley VC firm Benchmark, and one of tech’s top dealmakers, explained this phenomenon on Friday in a series of tweets:
An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The “unlearning” process could be painful, surprising, & unsettling to many. I anticipate denial. Some thoughts:
1) Previous “all-time” highs are completely irrelevant. It’s not “cheap” because it is down 70%. Forget those prices happened.
2) Valuation multiples are always a hack proxy. Dangerous to use. If you insist, 10X should be considered AMAZING and an upper limit. Over that silly.
3) You may be shocked to learn that people want to value your company on FCF [Free Cash Flow] and earnings. Facebook trades at 14X GAAP EPS, & is growing 23%. What earnings multiple are you assuming?
4) Revenue & earnings QUALITY matter.
Bill is without doubt one of the smartest people I know and always worth listening to. Most people dramatically underestimate the remarkableness of this bull run. Such things are unstoppable … until they aren’t. Markets teach. The lessons can be painful.
Bezos knows whereof he speaks, not only from AMZN’s current decline but from Amazon’s near-death experience during the dotcom bust.
Amazon was one of the few companies that came out alive and thrived. Countless pre-IPO companies shut down when the funding ran out because VCs were no longer funding them after the exits were blocked.
And countless companies that had managed to have an IPO and trade publicly also shut down and their shares went to zero, and the investors that had become the end-users of those shares ended up having to contact the brokers to remove those worthless figures from their account.
And there are still survivor out there from the dotcom bust, whose shares remain far, far below where they’d been in 1999.
What Gurley called “a 13-year amazing bull market run,” ended in February 2021 for IPO and SPAC stocks, and it ended later in 2021 for other stocks, and it has now more broadly ended as the stock market has seriously spiraled lower.
The “13-year amazing bull market run” was powered by waves of QE and by interest rate repression. QE has ended. Interest rates have started to rise. And QT, the opposite of QE, will be announced this week and start in May or June. It’s a different ballgame now.
IPOs can still happen, and can still succeed, but now the companies need to have real potential, real revenues, and the valuations will be a lot lower. Hype-and-hoopla stocks will get shookalacked.
But with the exits closing for investors in startups, fresh money flowing into these companies is getting scarcer, as investors are getting pickier and more prudent, and a bevy of startups will run out of funding, and then that’s it for them.
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