Public Markets Venture

What To Make Of Today’s Tech Selloff

An illustration of a sad unicorn

Today was not a good day for tech stocks. The tech-heavy Nasdaq fell just under 0.9 percent and all of the Big 5 tech companies lost ground.

Among the Big 5, here’s how they fell in order:

  1. Facebook shed 4.5 percent of its value.
  2. Amazon was down 1.6 percent.
  3. Microsoft fell by 1.5 percent.
  4. Apple was off 0.88 percent.
  5. Alphabet lost 0.81 percent of its value.

The tremor at the top of the stack was enough for Reuters to notice, reporting that the selloff had caused “worries that the top-performing sector [tech] is falling out of favor as investors look elsewhere for cheaper opportunities.”

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Reuters continued, noting that tech-centered “S&P 500 information technology index is near its highest since before the 2008 financial crisis.”

So were today’s market declines early cracks in a boom? Perhaps. It’s worth recalling that this is not the first time that technology companies have had a bad day in the market.

Let’s take a quick look.

Trickle Down Valuations

Although sheltered, the VC-backed startup world that we so often discuss is connected to the performance of the public market.

Falling share prices of public tech shops ding private valuations, potentially lower acquisition appetite, and can squeeze the wallets that startups were hoping to sell into.

So when Reuters quotes analysts stating that there is “definitely some panic” in the market leading to fears of “rotation” out of tech stocks, the broader startup ecosystem, and these pages, should take note. That in mind, let’s examine some major signals from the public markets to understand where we are after today’s declines.

Most broadly, the Nasdaq closed at 6,370.59 today, a mere smidge away from its all-time highest close of 6,461.32 set last week.

But that is a picture too zoomed-out for our tastes. So let’s take a quick look at three classes of public tech companies: the biggest tech shops, the cloud crew, and the new entrants.

The Big 5

The gyrations of the biggest tech companies are among the loudest indicators in the market. The five largest tech companies are worth just over $2.9 trillion today, a figure that is notable for no longer starting with a three.

The day that the group burst past the $3 trillion mark felt akin to a new Nasdaq 5,000 moment of sorts — a largely-artificial threshold that only mattered because it was broached during the later-periods of a boom cycle.

The Big 5 are now, on average, off just under 8 percent (unweighted) from their 52-week highs. The same companies are up over 35 percent from their 52-week lows (unweighted).

But as the following chart of the companies’ combined market cap (via Wolfram Alpha) shows, they are still within spitting distance of record highs:

Something else to note in that chart: the five firms managed to double their value since early 2015.

Takeaway: The Big 5 have undergone a very long and lucrative run. But for the warning bells to ring true, the Big 5 need to shed more than a few points of value. For now, the market is as it was.

The Cloud Cohort

Akin to the Big 5, the cloud kids are expensive yet free from injury (if that implies a greater impending correction is your call).

What we can say is that cloud stocks are doing fine in 2017. One particular vital sign of public cloud companies is the Bessemer (BVP) Cloud Index. We’ve covered it before, noting that it looked a bit “bubbly” in the process.

However, after that piece, the Cloud Index actually rallied higher before giving some ground. Currently sitting at 4,595, the Index is up 39.9 percent so far this year. It has yet to take any material damage since the early-2016 SaaS crash period.

But the companies that make up the cloud group are far smaller than the Big 5. The combined value of all companies in the Cloud Index is just $262 billion—a combined worth that is smaller than any single member of the Big 5.

Takeaway: The cloud cohort has undergone a very long and lucrative run. But for the warning bells to ring true, the cloud kids need to shed more than a few points of value. For now, the market is as it was.

Recent IPOs

Moving to our smallest companies, how are recent IPOs holding up? It’s a mixed bag.

As Crunchbase News reported in the middle of the Q2 earnings cycle of this year, about a quarter of US-listed tech IPOs were underwater at that point. Based on our own listing of tech IPOs for the year (US-listed, no biotech, etc), that number is now over 30 percent. And when Carvana periodically dips under its IPO price, that percentage creeps higher.

But the weakness among tech’s recent IPOs isn’t wildly new. Snap and Blue Apron’s struggles are well worn. And on the up are Okta, Redfin, Appian, and Alteryx, which isn’t news either.

Takeaway: The crop of recent tech IPOs has had a mixed year. But for the warning bells to ring true, it needs to shed more than a few points of value. For now, the market is as it was.

So What?

All that sums to the point that we should never extrapolate too much from a single data point, such as a day’s trading. But what this sort of moment does do well is highlight fair and material concerns.

The markets shook today, and that shaking brought some material fears from public-market investors out into the open. If those concerns bear out, we could see a stiff change in the value of public tech companies. And you should expect that concern to trickle down into the valuation of startups.

We’ll keep you abreast the public markets on occasion, as always, in case something comes up that will cause some Series C deals to fall apart.


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