Remember way back to, oh, six months ago when champagne was popping and markets were roaring? Back when companies with no or few profits could premiere on the world stage to grand applause by merely converting a dollar into fifty cents? Those were the good times of boom, boom, pow.
It’s amazing how quickly everyone has gone from rocking out to that tune to loathing those same beats. But that’s exactly what’s happened to the pop stocks of just a few minutes ago. Here’s a brief recap of just the last six months for three former stars:
- Zynga peaked at $15 in March, it’s now trading at $3. $8 billion has disappeared from its market cap.
- Groupon hit $25 in February, now it’s at $8. That’s another $10 billion in market cap lost.
- Facebook started at $38 in May, now down to $24. With almost two billion shares outstanding, that’s meant a drop of $27 billion — give or take — and a current market cap of $44B (not too far off the $33 billion I wouldn’t have paid two years ago.)
So between just these three, some $40 billion has been extracted from the market caps that pension funds and other last-sucker-in-line investors bought into. While, in the process, soured many on the idea of the public markets and enriched investment bankers hawking the toxic stocks. Hey, at least someone got out while the going was good.
Can someone kick the radio? We need a remix to get this party started again. Or we could, you know, change the channel and start valuing stocks based on fundamentals.
Nah, on second thought, fuck that. I hear Twitter is going for a $10B IPO. This Time It’s Different!
Note: Clarified the $40B extraction.
Paraic Hegarty
on 30 Jul 12Not to nit-pick (as your core point is correct) but it’s not right to say that ”$40 billion has been extracted from pension funds and other last-sucker-in-line investors”. That would imply that 100% of the stock of each company was sold to someone at its peak price, which is just not true.
Mark
on 30 Jul 12Words of wisdom, DHH—Words. Of. Wisdom.
Mike
on 30 Jul 12Cool story bro
Leon
on 30 Jul 12The worse thing is that people who should have known better (I’m looking at you, HN crowd) were (and some still are) unconditionally hyping Facebook, Groupon and all the other trash.
Keigan
on 30 Jul 12I don’t think its fair to generalize the entire market like that. LinkedIn is trading above its IPO price. Google had a tough year but came back.
There will always be overhype in the market, but when Zynga was at its peak, didn’t it feel like it deserved to be there? It was the number one game maker on the market! Furthermore, Apple, seemingly constantly written off as overvalued, continues to gain market cap.
My point is that yes, some companies lose value, but others gain. The Nasdaq is up 12% from last year! Don’t be so quick to write off an entire sector.
— Keigan
Benjy
on 30 Jul 12I agree with the general sentiment, but at the same time you profess long-term company building, you’re criticizing companies for short term ups-and-downs. Which isn’t necessarily an accurate reflection on the company itself.
I bought Amazon stock in 2000 for $33/sh and watched it plummet to single digits in the wake of the dot com bubble and post-9/11 recession. Then, I held on for more than a decade as Amazon grew and its stock climbed… I recently sold at over $200/sh. Yeah, their P/E ratio is high today, but a lot of that is due to the vast sums they are investing back into the business’ infrastructure and will pay off down the road.
Similarly, I bought Apple stock in 2000 and more in 2003 at an average cost of $12/sh. There was a time I was down almost 50% on that first batch of stock… but I held on, bought more, and now it’s up about 5,000%. Apple has grown like no other company in the world, has invented entirely new segments, yet it’s P/E is below the average of the S&P or else I might be up 10,000%.
So the question is, are there sustainable businesses behind Zynga, Facebook and Groupon that will succeed in the long term, even if their stocks flounder in the short term? Of those three, I think Facebook will do so. The other two, I’m not so sure. But maybe they are making adjustments to their business plans that will allow them to find success long term. I scoff at the long term viability of group deals, but I’ve read recently that Groupon wants to unify the POS, CRM, ecommerce, etc. systems that small business use and that don’t currently communicate well. Maybe that’s their future, and the deals become their computer business while their next endeavor is their iPhone/iPad.
Daniel
on 30 Jul 12I tell you what DHH. Since you’re such a fundamentals guy, why not set a fundamentals-based price and sell some 37signals on the secondary market? I’d buy it happily. It would help diversify you and some of your employees which is a prudent move, the investors would get common so wouldn’t be able to meddle and you could get a sense of price ahead of an eventual IPO. There has to be some price where you’d do this :)
DHH
on 30 Jul 12Daniel, I wish the market was a more reasonable place (also wish for the end of all diseases and world peace!). I think the basic idea of having the public participate in the growth of the economy through stocks is an excellent one. But for lots of technology stocks, it seems to have been distorted and perverted enough never to fulfill that role.
We have no interest in going public. I wouldn’t wish the stress that Zuckerberg, Pincus, or Mason must be going through on my worst enemy. Yes, they’re being handsomely compensated, but I would find that of little relief. When you’re the chief clown in such a carnival of financial destruction, it’s gotta hurt.
Bill
on 30 Jul 12“There has to be some price where you’d do this.”
The level of control 37signals has over their destiny is something I envy. They don’t have to answer to the stock market, they don’t have to answer to hordes of investors focused on price targets; they get to focus on customer service, not investor service.
Unlike investors, customers are recurring revenue.
Nathan
on 30 Jul 12This is why I come here
Daniel
on 30 Jul 12@DHH, fair enough, I agree with essentially all of your sentiments. I’d still take secondary in anticipation of a private company dividend (that is after all the reason people used to buy stocks)!
Oddly, tech stocks tend to amass cash well because of the unbelievably high gross margins and yet they tend to avoid the dividend in favor of reinvesting the money. As far as I can tell though, very few tech companies actually do reinvest that cash (Amazon being a very notable exception, h/t to your choice of investors).
I don’t know what you all do with the excess cash, but have you thought about a dividend? I assume you hold or bonus it out now and the presence of an external investor might complicate things. Just curious.
Eric
on 30 Jul 12There has been a lot of freshly printed dollars pumped into the market since 2008. I’d bet that has something to do with the overall rise in Nasdaq.
Travis
on 30 Jul 12@37signals
It’s unfornuately to see how little class you have in this post.
Jason Fried use to be on the Board of Directors at Groupon, yet you seem to be silent about that
David Andersen
on 30 Jul 12@Keigan,
LinkedIn? Can I really pay $100 for the privilege of having 13 cents in earnings? Sweeet!
DHH
on 30 Jul 12Travis, I used to be a big Groupon cheerleader until they revealed their awful financials and asked the public to give them the moon. Once you go public and play with funds of pension funds, it’s a a whole different ballgame.
Also, I just speak for myself, as is always the case. Jason was off the board long before they went public, but if you have any specific questions about that, you’re free to post them here and maybe he’ll address them.
Dave Lee
on 30 Jul 12http://www.businessinsider.com/facebook-shares-outstanding-2012-7
Henry Blodget is saying Facebook is valued at $65billion not $50billion. Just FYI.
Matt
on 30 Jul 12Precisely why fundamental analysis is flawed. (I am not saying that technical is perfect either). Digging a little deeper, the thought that there is one ‘correct’ discount rate is laughable and further complicates the valuation question. Certainly, for InvestorA a discount rate could be 15%, but for InvestorB the same investment could be 20%. Neither investor is wrong per se… Need to inject some behavioral economics into corporate finance – too many accountants…
Definitely agree with what you are saying…
Anonymous Coward
on 30 Jul 12Whatever. I remember you bitching about LNKD not so long ago.
Now they’re on the on the market and doing fine, but let’s completely forget about that, right?
DHH
on 30 Jul 12Yeah, LNKD is a peach of a stock. Their market cap is $10B and for that priestly sum you’ll get a company that’s trading at trailing 712 P/E. BUY BUY BUY!
EH
on 30 Jul 12Blodget has his own problems.
Kevin
on 30 Jul 12You forgot Groupon
Wandspiegel
on 30 Jul 12Not sure what the lesson is here, other than “shares sometimes drop in value”. I think most people understand that shares in tech startup IPOs are a fairly high risk business.
Peter Armstrong
on 30 Jul 12I agree with you regarding Zynga and Groupon, and am on the fence regarding Facebook. But either way, at any expected valuation (even $6 / share) of Facebook over the next year, Zuckerberg will certainly be able to meet his $100 million commitment to Newark schools. So your point in that other post is incorrect.
DHH
on 30 Jul 12Peter, my point was that it was a premature commitment at the time. “Don’t sell the skin till you have caught the bear” and all that.
Antti
on 30 Jul 12@DHH, can you tell why you’re so interested in stock markets? The reason I’m asking is it seems a bit weird to me as Getting Real and Rails are fantastic and about getting things done. Stock market and IPOs are about crazy money and weird stuff. Now based on your blog and Twitter, you seem to be more interested in the money and markets. Is this true and if it is, why?
DHH
on 30 Jul 12Antti, I take it you weren’t around for the first dot-com bust?
David Haddad
on 30 Jul 12Just read this Hacker News comment that seemed to go against what you imply with the $40 billion claim.:
“This is incorrect, David takes the change in market cap and then equates that to losses in pension funds. But this does not represent the state of affairs because when companies go public they don’t put all of their stock on the market, rather they put a small percentage of the company on the market (called ‘the float’) and it is those shares IPO investors get to buy. For Groupon this was an notably small percentage of the company (which caused short sellers to complain that there wasn’t enough liquidity to short the company).
So lets be generous and say it was 10% of the companies involved then you are looking at a change in value that is 4 billion not 40 billion. Next pensions invest in hedge funds just as much as they do companies, and those hedge funds took a good chunk of that money because they are shorting these companies with questionable valuations. They could be having a great time with the IPO market.
So yes, there are investors who are holding GRPN, FB, or ZNGA who have lost money but it isn’t a travesty, and it isn’t 2000 again, and it isn’t newsworthy. A pension fund might own a big position on Ford (NYSE:F) which they bought at the beginning of the year for north of $12 share and its now worth $9. Doesn’t mean the ‘music has stopped for Automakers’.”
Antti
on 30 Jul 12DHH, it didn’t effect me financially. For me Getting Real, you and Rails are about building a real business (paying customers, profitable company). Stocks and IT IPOs are some odd shit, about marketing and other non “real” stuff. I don’t get why are you talking about that crazy Wall Street stuff. What am I missing?
Mark
on 30 Jul 12Questionable valuation was DHH’s point, and small investors bilked by the media hype don’t have the deep pockets to ride out the market correction after such staggering miscalculations of value. The pump and dump is not exclusive to the IPO, either - one only need recall the Enron debacle. The 7th-largest corporation in America was able to bluff the market with their b.s. for years, while their bankers were funneling them money through illegal transactions such as Nigerian barge purchases… which were really just loans for their continued corruption, and not only did the bankers not tell Enron “no;” their attorneys failed to do so, market analysts failed to do so, and all of their internal traders failed to step forward and speak up. They even built a $ Billion electric plant in India, knowing that India would never be able to afford it (the reason Exxon or Mobil, etc, had not yet done so), but building a big infrastructure was a nice green flag to the financial media whores who would exalt Enron’s new market vanguard… Give me a break, the whole financial services industry (which represents more than 20% of the total market cap of the S&P 500) is built on a foundation of corruption. Even JP Morgan Chase’s CEO admitted that if his industry had been better regulated, his company would have been unable to gamble away nearly $3 Billion … lost on a hedge fund scam, if I recall.
I applaud 37s for running a sound business the honest way: money earned for actual products (services) rendered.
Mark
on 30 Jul 12I don’t get why people are saying DHH is speaking favorably about the whole stock market/public co/IPO idea? There is nothing in his post that even hints at a favorable impression of these things. He even then, later, stated
Ryan Bradley
on 31 Jul 12Great post, but you forgot to mention Digg, sold for $500,000.
Ian
on 31 Jul 12@DHH – how you can compare this to first dot-com-bubble? Are you blind or what? Also, not sure, why you are so interested in this subject. Too much time to waste? I wish to see some meaningful posts, not that crap about stocks etc.
Get a life!
Mark Morrison
on 31 Jul 12So what you’re saying is that these stocks went up, and then they went down again? Wow, what an insight.
Anyone can be a genius in hindsight. If you thought these stocks were overvalued based on “fundamentals” you would’ve shorted them and made a killing. Why don’t you put your money where your mouth is?
RDO
on 31 Jul 12Remember that the markets are more or less a zero-sum game. So, it not $30 billion gone in smoke. It’s $30 billion that changed hands.
RJ
on 31 Jul 12Oh God. Yet another post by 37signals whining about the stock market / IPO
MattBeue
on 31 Jul 12I don’t understand why there are so angry about Dave’s opinions or comments!
This is a “personal/company” blog, they write what they want to.
Anyway I think this usefull (Tech… stock market… etc).
MattBeue
on 31 Jul 12Correting Above: “I don’t understand why there are so MANY ANGRY USERS about Dave’s opinions or comments!”
DS
on 31 Jul 12DHH
I think changes in the economy, technology and the amount of investor capital tied up in the markets has made the markets less about good companies doing well and more about gambling and trends and risk. Even “low risk” securities and funds go down often. These are not our parents or our grandparents’ stock markets. These are markets where some software for large and even small funds will buy and sell on an automated basis with no regard for the actual vitality of the companies being bought and sold.
I hate to say this, but I question the markets and the public’s participation in them. This was not what was intended in my opinion. So, yes the overvalued over-hyped tech stocks are ridiculous but I think the markets are the larger problem in general and the way participation has become so widespread and prone to “market movers” and instant algorithms and at the end of the day, just gambling with no real concern for a company’s true worth and true vitality. You and I should start something together to combat this somehow.
Benjy
on 31 Jul 12Remember that the markets are more or less a zero-sum game. So, it not $30 billion gone in smoke. It’s $30 billion that changed hands.
Not so, RDO… companies’ overall market cap (the value of all stock for that company) go up and down all the time, and all current shareholders are losers when it goes down. Nobody makes that money… it’s value just doesn’t exist anymore when the value of a company disappears.
There are however, ways to make money on falling stocks. Shortsellers might make money, but they’re not shareholders. With other derivatives like options and futures, which are effectively two parties taking opposite sides on a bet, it is effectively zero sum. But those are different than holding shares in the company itself, too.
RDO
on 31 Jul 12Benjy,
Agreed that the value or perceived value of a security is not a zero-sum game; however, when you introduce short sellers and as you mention options, futures and other derivatives, the markets are, as I said, more or less zero-sum. So with the debacle of FB, for instance, people who bought at $45 got a 50% haircut, but someone who shorted it at that price is making nice coins. So the value it lost to someone, it was gained by the other.
Benjy
on 31 Jul 12But RDO, it’s not zero sum because there aren’t equal numbers of short sellers as their stock buyers. Even when a stock is widely viewed negatively, there may only be 10% of the stock sold short (just checked FB, and it’s 56M share short interest out of 635M float). So 90% lose and 10% win. And that doesn’t change the fundamental issue that the company’s market cap has fallen, and that isn’t a zero sum proposition. The company is just worth less, but nothing is suddenly worth more as a result.
It’s no different than if your house or car goes down in value… your neighbor’s house doesn’t go up in value because yours went down. The depreciation on your old car doesn’t magically transfer to some new car on a dealer’s lot.
Customer Service Careers
on 01 Aug 12It was the number one game maker on the market….....
DS
on 01 Aug 12@ Customer Service Careers
That’s the problem – what market? Facebook?
Anonymous Coward
on 02 Aug 12further example from news today of markets being out of control and not what was intended by anyone:
“Knight Capital Group Inc. said electronic-trading glitches in its system that caused price swings in dozens of stocks this week are likely to cost the brokerage firm $440 million.”
I bet the cost to consumers and innocent investors is even higher. What kind of “market” is this?
This discussion is closed.