A lot can happen in a year that’s surprising, but what, if any of it, has enduring importance?
TheStreet has tallied up a few things that happened to tech stocks this year that stand out as unusual, or at least, not expected by the majority of investors. Some were merely blips on the radar, irrelevant to long-term investing, but others have longer-term import.
One of the biggest surprises, and a disappointment for many, was the complete collapse of this year’s IPO darlings, and prospective darlings. We’re talking about not just Uber (UBER) - Get Uber Technologies, Inc. Report and Lyft (LYFT) - Get Lyft Inc Class A Report, which are down roughly 30% and 40%, respectively, since their debuts in the spring. That, after all, was not entirely surprising, as TheStreet warned investors last fall to stay away from both.
No, more significant is how the entire class of 2019 has fallen apart. Stocks that started out nicely, such as tech vendors PagerDuty (PD) - Get PagerDuty, Inc. Report and Tufin Software Technology (TUFN) - Get Tufin Software Technologies Ltd Report, started to break down as summer came. Another social-media darling, Pinterest, fell 21% from its offering in April. And two of the most promising software vendors in recent memory, Zoom Video Communications (ZM) - Get Zoom Video Communications (ZM) Report, and Slack (WORK) - Get Slack Technologies, Inc. Class A Report, flamed out. Zoom is up just 7.5% since its April IPO, trailing the S&P 500’s 11% return, and Slack’s 45% collapse since June is stunning.
Are these implosions significant? TheStreet warned back in the Spring that the high-flyers would come down, so some of the collapse was foretold.
But the decline is still significant in the sense that they are part of a broader sell-off in highly speculative issues, including young cloud stocks such as Twilio (TWLO) - Get Twilio, Inc. Class A Report, which has massively underperformed the Nasdaq this year, rising just 12% compared to 35% for the index.
Even more telling was the cancellation of the IPO of WeWork, the newfangled property manager backed by Japan’s SoftBank. All of these developments, from Uber to WeWork, are part of investors moving to more predictable and secure investments during the late, late stage of a fabulous ten-year bull run for the stock market. With a return of 55% on a rock-solid name such as Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report, there’s simply no need to buy young companies that are mostly losing money.
Whether the souring on speculative tech issues continues will be tested in 2020. Analyst Pierre Ferragu of New Street Research, who has been a big defender of Uber, released a report this week in which he notes that dozens of tech unicorns are expected to go public next year, after 45 total IPOs this year.
Ferragu argues that Uber’s massive loss in value is a “once-in-a-decade opportunity,” as its assets “will likely hit excessively low levels of valuation before normalizing, while management will be under pressure to deliver rapid improvement in financials.”
Speaking of Microsoft, one of the more surprising developments this year was the company’s receipt of the “JEDI” contract to supply the Department of Defense with cloud computing, worth $10 billion over a decade. Amazon (AMZN) - Get Amazon.com, Inc. Report lost to Microsoft, which was surprising because Amazon was favored among analysts to win it.
Amazon has filed a “bid complaint” in the U.S. Court of Federal Claims, alleging president Donald J. Trump intervened in the review process to block Amazon, out of his antipathy for Amazon founder Jeff Bezos.
Amazon’s claims notwithstanding, Microsoft’s being awarded the deal is at least in part a recognition of the increase in prowess of the company in cloud applications relative to Amazon. For years, Amazon was solely the “thought leader” for cloud technology. Now, Microsoft clearly has come of age as a very capable number two in cloud technology, which should give Amazon investors pause. Amazon shares are up 19% this year, trailing the Nasdaq.
Amidst the crashing of high-flying stocks, Okta (OKTA) - Get Okta, Inc. Class A Report emerged as a survivor. Okta makes software to authenticate corporate employees, such as “single sign-on” for corporate applications, a password that works across numerous corporate software packages. It was surprising to see a single young company so outpace the rest of the pack. Its financial achievement is real. The company’s revenue estimates for this year and next have been rising all year, and now represent a heady 44% rate of annual growth.
The question is, can it last? Okta’s growth is expected to cool to a still impressive 32% next year, and 29% the year after, when it will be approaching $1 billion annually. It’s possible investors will cool on the company as its growth slows, but Okta could do M&A in the intervening period to boost that profile. It is no doubt a target for a large acquirer such as Microsoft or IBM (IBM) - Get International Business Machines (IBM) Report, and at nearly $15 billion in market cap, Okta would not be an impossible buy.
A surprising development, but one that perhaps ultimately is not significant, was the surge of Bitcoin starting in the spring. The crypto-currency reached almost $14,000 per coin on June 26th before plunging by fifty percent to a recent $7,195. It wasn’t as impressive as the coin’s late-2017 surge, when it went over $19,000, but it was striking, as it came after a multi-year fall-off for the currency.
Bitcoin’s jump was arguably fueled by expectation of Facebook’s (FB) - Get Facebook, Inc. Class A Report announcement of its own “Libra” currency. But Libra has struggled as partners of Facebook have given up, and Facebook CEO Mark Zuckerberg has had to defend the company’s role as steward in front of Congress.. Regardless of whether Libra survives, or fails, as TheStreet has predicted it will, crypto is surely here to stay in one form or another.
The surge in Bitcoin, as TheStreet wrote at the time, is of zero significance. The lack of significance, in fact, is what defines Bitcoin at the moment, as the currency is not pegged to real assets but instead floats freely with speculation.
It’s good to know some things just don’t add up to anything you need to think or worry about.