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Tech's Freshest Faces Suffer 'Black Swan' Dive

By Jeremy C. Owens
May 9, 2014 9:35AM

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Silicon Valley has enjoyed a surge in initial public offerings in the past two years, with 20 of the region's largest 150 public tech companies making their market debuts. But taken as a group, the 20 companies' stocks have declined 49.9 percent from their collective peak price, which was quadruple the valuation delivered at IPO time.
 



The rookies are struggling. In a stunning fall from Wall Street's grace, large Silicon Valley tech companies that went public in the past two years have lost roughly 50 percent of their peak market value, an analysis by this newspaper shows, driving down the tech sector for weeks in a slide that worsened Wednesday.

Highlighted by Facebook in 2012 and Twitter in 2013, Silicon Valley has enjoyed a surge in initial public offerings in the past two years, with 20 of the region's largest 150 public tech companies making their market debuts in that time period. Enthusiasm for the newly available companies -- dominated by social media, cloud software and security companies -- initially sent their market valuations soaring. But that trend has reversed in 2014.

Taken as a group, the 20 companies' stocks have declined 49.9 percent from their collective peak price, which was quadruple the valuation delivered at IPO time. For a comparison, the 20 largest tech companies in Silicon Valley have declined 10.7 percent from their 52-week highs.

Silicon Valley's newfound weakness has pulled the tech-heavy Nasdaq composite index down 7 percent from highs reached just two months ago, and the stock values of the valley's top 150 tech companies as a whole are off 14 percent from their high of the past year.

Brendan Connaughton, chief investment officer of San Francisco wealth management firm ClearPath Capital Partners, called the sudden, steep drop in newly public stocks a "Black Swan" event, a term popularized in a 2007 book that connotes a large, unforeseeable price swing. While there could be many causes for the downturn, Connaughton noted that hedge funds and other Wall Street investors can jump on a stock and drive it too high, then bet on it to fall when it heads back down and send it too low.

"That's the problem with being the noteworthy name in the news," Connaughton said. "You're going to get all your momentum guys on the upside, and then they're going to go bailing out, and then your shorts are going to jump in when they see (the decline) and push the stock down to unrealistic levels." Short sellers make investments betting that the price of a stock will decline.

Quarterly earnings reports are also having an effect: Investors typically react more strongly to the financial performance of young companies as they attempt to model their future, Santa Clara University professor Robert Hendershott said. (continued...)

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© 2014 San Jose Mercury News (CA) under contract with NewsEdge. All rights reserved.
 

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