High-tech conjures up images of the smart San Francisco set, youthful CEOs in jeans and suit jackets. There they are: kicking up their feet at a funky coffeehouse, sipping some exotic Ethiopian espresso, plotting out one more e-commerce conquest before heading home to million-dollar lofts…
Sorry to interrupt your daydream. But the fact — and it is a verifiable statistic — is that 90 percent of startups fail. Those that succeed might only enjoy a limited run of success. Maybe a few, like Instagram, are lucky enough to get bought for $1 billion by Facebook (ticker: FB). But otherwise, in going public, high-technology’s high riders still experience nauseating ups and downs.
Consider Fitbit (FIT), a pioneer in wearable tech that’s bested many of its competitors, including Apple (AAPL). After going public in June 2015, Fitbit saw its share prices jump more than 40 percent to $47.60 a share. Then the sprint turned into a winded stagger; since that runner’s high, Fitbit has dropped 70 percent to just $14.32 a share. And that performance comes from a company that controls roughly a quarter of the wearable tech market.
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“Square (SQ) is another good example of the hype attached to tech IPO’s,” says Gary Tsarsis, clinical assistant professor at the University of Pittsburgh’s Katz Graduate School of Business. “In particular, they had a very good product about three to four years ago. It was cutting edge, new, simple to use and gained a good word-of-mouth following.” In fact, try walking into many a San Francisco coffeehouse without seeing a Square, attached to an iPad, anchoring the cash register.
But once again: Does ubiquity equal profitability for investors? Not by a longshot. “During the past several years, other companies have come out with similar technologies, thus reducing Square’s competitive advantage,” Tsarsis says.
Square is down 35 percent from just a month ago, and off roughly 25 percent since going public in November, trading at $10 a share.
Elsewhere, evidence of high-tech turbulence has rattled many shareholders. Corbin Perception’s Tech Sentiment Survey, released in April, reports that investors largely exhibit a neutral stance toward tech as bears slowly creep in — with bulls more than cut in half since June 2015.
Meanwhile, the sidelines are starting to look quite appealing, even for starry-eyed investors in the cheerleading section.
The Corbin report shows that three out of four respondents expect in-line or worse-than-consensus results for first quarter of 2016 earnings reports. The one bright spot — speculative but still bright — is the software sector, where three out of four investors land on the bullish side.
Yes, but, those software winners likely won’t come from IPOs. “According to Renaissance Capital, tech IPO activity in 2015 was at its slowest level since 2009,” Tsarsis says.
And much like a landfill stuffed with outmoded smartphones and floppy disk drives, the investment landscape is littered with one-time tech darlings that fell out of fashion faster than you can say “Groupon (GRPN).”
That Chicago-based daily deals site hit the ground running at $20 per share in 2011. It closed 30 percent higher its first day of trading — and that was as high as it ever got. Today, Groupon trades at a lowly $3.50 a share. That’s almost 87 percent off, shoppers. A Groupon for Groupon stock, anyone?
Cross over to the search engine space, and the story is much the same. You might have to look up “search engine failures” on Google (GOOG, GOOGL), because it would be impossible to do so at many a site that’s come and gone.
“There have been several failures: Excite, WebCrawler, Netscape and Ask Jeeves, for example,” says Bob Johnson, president and CEO of the American College of Financial Services in the greater Philadelphia area. “In other words, even if you realized web search was going to be huge, you would have either had to choose the right horse to ride or bet on many horses.”
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Meanwhile, a onetime “right horse” is close to being put out to pasture. In February, Yahoo (YHOO) put itself up for sale. It’s a sad chapter, and perhaps the closing one, for an Internet pioneer that lost its way and never quite recovered. Nor did the publicity gaffes help. Workaholic CEO Marissa Mayer made headlines when she banished telecommuting — a move that hurt Yahoo’s working moms — but built a nursery next to her office so she could take care of her own child while on the job.
“Yahoo is a deeply uncelebrated company with a low valuation at odds with its hugely profitable business model,” says Barry Randall, a technology portfolio manager at Covestor and a registered investment advisor based in Boston. “Even the phrase ‘at odds’ doesn’t do the situation justice. Yahoo is the third-largest digital media property in the U.S. in terms of daily users. Yet its public image is that of an Internet has-been.”
Even 2015’s giants are staring nervously in the rear view. In December, Netflix was trading at all-time highs and finished 2015 up a giddy 125 percent for the year. But so far in 2016 it’s off 18 percent, trading at $90, and facing stiffer-than-stiff online competition from the likes of Amazon.com (AMZN) and Hulu.
“Giant rising costs to produce very expensive content and heavy costs for first run movies — more than $10 billion dollars over the next five years — are finally going to hit them hard,” says Eric Schiffer, CEO of Patriarch Group, a private equity firm with offices in Santa Ana, California.
“What makes (CEO Reed Hastings) think they are better content creators?” he asks. “There is a graveyard I can point to full of people who thought they could master Hollywood. We will watch a documentary one day on how Netflix was overtaken by competitors in the long term.”
And Jeff Weiner, the CEO of LinkedIn Corp. (LNKD), might want to do some heavy networking on his website to find a savior. “LinkedIn stock has had an awful quarter, given the sharp drop in its stock price in early February and the company’s inability to recover since then,” says Jeffrey Zucker, an angel investor and co-founder of Green Lion Partners in Grand Junction, Colorado.
Since the start of the year, LNKD is down 43 percent, to $129 a share. The result? “Almost every major research firm has downgraded the company’s stock,” Zucker says. “Users are concerned that LinkedIn’s job postings are no longer growing and investors are decreasingly confident in the business’s ability to generate revenue.”
So let’s review: Groupon, Fitbit, LinkedIn, Square, Netflix, Yahoo and yes, Twitter (TWTR) — all of them big names in high tech circles — have either stumbled, stumbled badly, or slipped down a rabbit hole blacker than Steve Jobs’ turtle neck.
Schiffer says, “Valley CEOs of monster billion dollar startups, who could never imagine valuations dropping, now face the precipice of nervous breakdowns that test their sanity and strength.”
[Read: The Incredible Shrinking World of Investments.]
So check back at your favorite San Fran java haunt in a few months. The blockbuster entrepreneur you see today could be your brand new barista tomorrow.
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High Tech, Low Returns originally appeared on usnews.com
