Tech unicorns face fresh bubble fear
Traders are piling up short interest on early stage technology firms after a string of young companies made market-busting initial public offerings (IPOs). The so-called “unicorns” – companies which are valued at $1bn before they have launched onto the stock market – are being targeted by traders betting their share prices will fall.
Although they are known as unicorns because of their mythical, elusive status, there are plenty of companies around like this at moment – Uber, Airbnb and Just Eat, for example. Last week the owner of dating app Tinder, Match Group, listed on the stock market and its valuation rose to $3.54bn following its debut.
The number of unicorns around has been enough to garner speculation that many of these firms are overvalued. Some investors say it looks like a repeat of the dotcom bubble, or dotcom 2.0, is heading our way. “At risk are the unicorns,” says Mark Tinker of AXA IM. He highlights the decision by fund manager Fidelity to write down the value of its stake in photo sharing app Snapchat. It is one of Silicon Valley’s most highly-valued companies, with a $15bn price tag. “The announcement by Fidelity may be something of a canary in the coalmine of the latest private equity tech bubble game of unicorns,” he says.
FIZZLING
The technology sector is often faced with speculation over whether its most prized companies warrant their valuations, given many depend on intangible assets, a small number of products or services which are difficult to monetise.
But some data appears to show enthusiasm for young tech companies is waning. Demand to borrow stocks of newly listed companies – which happens when traders bet the price will fall – has been increasing this year, according to data from Markit. “Scepticism towards recent IPO listings is fairly universal,” its report states. Some recent IPOs have been lower than previously anticipated. Twitter chief Jack Dorsey’s latest venture, mobile payments company Square, was valued at $4.1bn recently, down from $6bn last year.
Fitbit Inc, which makes wristbands tracking wearers’ exercise and sleep patterns, has been the target of the most negativity. The company rose to a $4.1bn valuation shortly after its June flotation but has tough competition from Apple, Garmin and Jawbone which offer similar gadgets. Now 41 per cent of Fitbit’s free float is out on loan. “There is a lot of pretty negative sentiment in the market overall,” says Markit’s Simon Colvin. “Fitbit encompasses a lot of that… the product line offered is quite narrow and there is a lot of competition.”
Investors in technology are used to critics calling “bubble” at every opportunity. Backers of the sector argue any judgements should be made on the fundamentals of specific companies, rather than the industry as a whole. “The majority of the large unicorns in Europe – Spotify, Farfetch, Klarna, Supercell, Just Eat and others – have generated hundreds of millions of dollars in serious revenue and have been efficient with their capital,” says Manish Madhvani of investment bank GP Bullhound.