Apple chief Tim Cook sure sounded like he was spooked on Monday.
After a steep plunge in China’s stock market and as Apple’s stock prepared to nose-dive ahead of the opening of US markets, he took the unusual step of sending an email to Jim Cramer, host of CNBC’s ‘Mad Money’, saying that Apple was going to be all right.
“I can tell you that we have continued to experience strong growth for our business in China through July and August,” Cook wrote, noting that he gets daily updates on Apple’s business in China.
That Cook, head of the world’s largest company by market capitalisation, would take the time to send such a missive seemed to perfectly capture the depth of panicky concern hitting the markets on Monday, especially in a tech sector struggling to weather China’s economic storm. The jittery markets also stoked fears that a host of tech start-ups preparing to go public would delay their plans.
Cook’s brief letter, which was shared on Twitter by Cramer’s CNBC colleague Carl Quintanilla and then read on-air, appeared to calm market jitters, even as it raised eyebrows. As Cook’s note was being shared widely, Apple’s stock — which initially plummeted as much as 13 per cent — made up most of those losses and ended down 2.6 per cent. The reversal helped lift the rest of US markets as well.
The wild gyrations of Apple and US markets highlighted a deepening concern that the tech sector may be seeing the end of a years-long boom. More than in other industries, the sky-high stocks of such sector stars as Apple, Facebook and Google are built on the assumption of future growth and the ability to exponentially expand sales of gadgets or the acquisition of new subscribers outside the US.
For a while, the potential for growth looked spectacular, driving share prices up. But any hint that global sales of smartphones or other services may fall short could make those stocks fall all the harder.
Shares of leading tech companies were among the hardest hit early on Monday, with Facebook down as much as 13 per cent and Google down 4 per cent at one point. The tech-heavy Nasdaq index was down as much as 5.1 per cent before closing down 3.8 per cent at a 10-month low of 4,526.25.
“The tech industry is a barometer of economic progress and innovation. Therefore, its success is an indicator of general economic progress, which eventually translates into growth,” said Cristian Tiu, a professor of business at the University of Buffalo’s School of Management.
But what’s really terrifying executives and investors in the technology sector is the chilling effect a slide in global markets could have on the many richly funded start-ups that aren’t trading yet on exchanges. With so much uncertainty and market volatility, Silicon Valley firms could postpone initial public offerings, cooling a white-hot market for venture funding that has fuelled the most lucrative environment for start-ups in history.
Executives at RainDance Technologies, a firm that makes genomic tools to detect cancer and other diseases, announced Monday they have pulled their plan to go public, according to Reuters. And the big question is what will happen to the hundreds of start-ups — a record 131 are valued at more than $1 billion (Dh3.67 billion) — that are all dressed up for IPOs but could have no place to go.
One prominent venture capitalist in Silicon Valley is warning of casualties. Bill Gurley, a partner at Benchmark Capital who has invested in such new companies as Uber and GrubHub, wrote in a series of tweets last week that the stock market movements will directly affect the start-up environment.
“Tech stocks have been getting crushed the past six weeks. Many names are down 25-50 per cent from their highs. Today was very tough,” Gurley wrote in a tweet last week. “One might reasonably assume that this would have an adverse impact on late stage private market liquidity and valuation. I certainly do. If so, we may be nearing the end of a cycle where growth is valued more than profitability. It could be at an inflection point.”
The 131 venture-funded firms valued at more than $1 billion, known as “unicorns”, have a total valuation of $485 billion, according to the venture capital research firm CB Insights. The sheer quantity of unicorns has for months caused concern of a start-up bubble, with investors racing to put money into bleeding-edge innovators and their many imitators, even though logically not all will thrive or even survive.
Among the most anticipated start-ups are Uber, valued around $51 billion; Airbnb, valued at $25 billion; and Snapchat, valued at $16 billion.
None of those valuations is really a problem if the markets are steady — or, even better, continuing to rise. These tech start-ups aren’t profitable and are spending heavily on their expansion into global markets. Some haven’t shown a path to profit, but are built on the promise of future growth.
Many, including Uber and Airbnb, have attracted massive investments by venture capital firms with the promise they will expand into China, India and other emerging markets.
After early investments from seed and venture capital firms, the way to continue growing and to raise capital for expansion is typically through two paths: initial public offering on stock markets or acquisition.
Now, with stocks in turmoil, the fates of these companies are in question. They will have to rely on venture investments for their expansion plans. Venture capital investors will be more cautious about their bets.
If China’s growth continues to slow and global markets stay in a slump, eventually the funding of venture capital firms could soften.
“It’s worrying for companies who were planning to go IPO and are now forced to stay private,” said Matthew Wong, a research analyst at CB Insights. “Those big funding rounds in the last year or two will be crucial to moving forward, because the IPO window is closed right now.”
— Washington Post
