So, tech investors, how's your new year going so far?
How's your new year going so far?
If you've got a lot of long investments in tech stocks, the answer is probably, not so good. The first three days of 2016 have been the worst start for global stocks since 2000. Tech stocks are taking a particularly hard hit, with the Nasdaq Composite down 3.4 percent so far this year. The first several days of the year is often seen as a proxy for how investors see the rest of the year going. Typically, it's a good week. When it's a bad week, investors are skittish.
The compairison to 2000 is always a tricky one, because things were very different in 2000 - after dozens of startups went public with nary a prayer of profit in coming years. Tech IPOs in 2015 were notoriously scant, and the select few that went public and saw their stocks rise throughout the year are slumping in early 2016. Fitbit, for example is down 23 percent and Square is down 12 percent, although both are still above their offering prices.
Still, those who seek reassurance in pointing out how different 2016 is from 2000 should take note of other key differences. For one thing, the ability of governments to make aggressive moves is greatly diminished by comparison. The Fed had ample room to cut interest rates after the dot-com crash. Now it has no such room and is more likely of a mind to raise them.
More importantly, global markets are much more tightly interconnected than they were 16 years ago. Weirdly parallel to the characters in Sens8 who keep stumbling into each other's lives, markets that are used to minding their own business are finding their own fates shaken by volatility far, far away.
Speculators panicking to sell their shares in Shenzhen spill their fears over to emerging markets that not only export to China, but also make up the bulk of smartphone users on which Silicon Valley is pinning its hopes for future growth. Plunging oil prices are scaring investors in junk bonds that financed the US oil boom last decade, and that caution could curtail appetite for companies seeking an IPO this year.
What about the Great Recession of 2008, when all tech startups braced for the worst, and yet some of the strongest tech companies today were founded and funded? Will young companies with solid innovations and smart founders behind them find themselves relatively insulated if global markets continue to go south?
The answer seems to be, yes and no. But mostly no. The top tier VC firms will not have much problem raising money from limited partners, given the inherent long-term perspective of venture investing. And those VCs won't pass on startups they believe in, just as they didn't in 2008 and 2009.
But if the dour mood of risk aversion that has greeted 2016 continues through the year, the line between the chosen and the rejected will be redrawn to embrace fewer and fewer of the chosen. Those admitted onto the ark are going to be just fine. The catch is, it's going to become a lot harder to get safely on that ark.
This is even more true for companies looking for an exit rather than a round of seed financing. M&A deals in the US last year totaled $2.3 trillion, according to Thomson Reuters, up 64 percent from 2014. Global M&A totaled massive $4.7 trillion. Companies looking to acquire spent big last year anticipating the tighter liquidity conditions we're beginning to see now. They are likely to wait for bargains in 2016, which can't be good news for tech companies looking to be bought.
The IPO market is also sure to grow stingier the more the broader market slumps. Companies like Square and Box went public last year below their previous private valuations, but in retrospect they may be considered lucky simply to have raised public money at all. Again, a handful of private tech companies will have no problem staging an IPO, but the majority could struggle to enter a market they shunned in previous years.
This gap between the clear winners and the others who will struggle to survive has been evident for a few months now, but it's interesting to see how it's shaping up this week. Again, take Fitbit, a company that has drawn much skepticism about its business model but has won investor support because of its record of strong profits. Fitbit plunged 18 percent Tuesday after revealing a rival to the Apple Watch. The move was expected, as was the inevitable judgment that it couldn't really rival the Watch, so there's no real surprise here. Investors are simply looking for signs of weakness as an excuse to sell.
Other tech stocks are getting hammered early on in 2016. Twitter has lost another 7 percent of its value in three days. Yelp has lost 10 percent and Pandora 16 percent. The selloff is strangely incongruous with the steady flow of tech news as CES takes over Las Vegas: Twitter expanding its character count, Netflix pushing to more countries, Apple's (yet again) record holiday season, a zillion shiny new phones and gadgets for consumers to ignore.
Tech's ability to innovate away as signs mount of a grim market in 2016 speaks to its remarkable resilience. But it also has an element of denial to it. Everyone aspires to innovate, but the attention and dollars spent by consumers may not only grow scarcer, it may favor a few already giants: Apple, Facebook, Netflix, Amazon.
The best hope for everyone else is that the brisk selling we've seen this week is a short correction, quickly erased by an even stronger rebound. That outlook depends on there being more reasons for growth than there are for a global slowdown. Right now, the expectations are that this month's earnings parade will only deepen the market's bearish mood.
That could be good news for giants looking to consolidate their market shares. Everyone else, strap in for a rocky ride.