Which tech stocks are suffering and – crucially – why?

The 2016 Silicon Valley shakeout has begun

Analysis With the stock markets on a slide since the start of the year, the usual game of over-hyping companies that are doing well has flipped and now the game is to give companies – particularly tech stocks – a good kicking on the way down.

Much of the current frenzy appears built around Twitter, which is having a bad year, and the headline-worthy fact that its CEO Jack Dorsey is no longer a billionaire because of drops in both Twitter and the other company he is CEO of (yes, it still sounds ridiculous), Square.

The indignity of only being worth $950m aside, we felt it was worth looking at what is really happening with a particular focus on tech stocks. And this is what we found:

1. There does appear to be a tech shakeout on its way

For most of the second half of 2015, there was a sense that the ludicrous valuations of new tech companies – the so-called unicorns – had gone on long enough and it was time for a tech bust.

The big difference between 2015 and the dotcom bust of 2000, however, is that most of the over-valued companies are not public companies and their valuations are pure invention from Silicon Valley VCs.

There are, however, a small number of these new tech marvels that did IPO in 2015 – and we have evaluated all 11 of them. Taken as a group, their stocks have fallen by 19.2 per cent since the start of the year.

That compares to a drop of 11.38 per cent for the Nasdaq as a whole, and an S&P drop of 9.62 per cent – so significantly worse.

Of that group, three have effectively followed the general tech stock trend, dropping between 10 and 12 per cent (First Data, GoDaddy and Match Group). Incredibly, big data company Apigee has actually gone up by 5.11 per cent, making it literally the only tech stock we have reviewed that has increased in value.

Of the remainder of the 2015 IPO group, there are two sub-groups: those doing badly and those doing really badly.

• Badly: Etsy, Pure Storage, Shopify
• Really badly: Atlassian, Box, Fitbit, Square

The worst hit is Fitbit – 40 per cent down – so much so in fact that people are writing articles solely about its decline. It is a little exceptional however, since Fitbit had a big product launch this month – the Blaze – which was a little expensive and not wonderful. The company is still valued at 30 times its earnings though, so in one respect it is still a good bet.

A more interesting one is Atlassian, which is down nearly 26 per cent year-to-date. Atlassian makes collaboration software tools and so could be a perfect indicator of the new tech market: if the tech bubble bursts, it will take a lot of Atlassian customers down with it.

Atlassian is growing and it is profitable and it also did extremely well in its late-2015 IPO, jumping a third in value on the first day, as opposed to the 2015 average of 14 per cent. The fact that it is down more than the market, despite such a good entry, is a strong indicator that the market is expecting a tech shakeout this year.

And in that sense Box and Square represent that exact market: upstarts that have massive valuations but revenue far lower than their costs. In other words, the exact sort of companies that will be the first to be hit over the head when financial realities dawn. The market is indicating pretty clearly that growth at the expense of actually making money has become less attractive.

2. The big, established tech companies are doing fine

We looked at the biggest 25 tech companies in the Fortune 500. As a group, since the beginning of the year, they have fallen 10.3 per cent. Which is pretty much exactly in line with the broader market decline (Nasdaq down 11.38; S&P down 9.62).

None of them have gone up in share price – which you would expect from such big beasts. It is worth noting that the companies doing the best are the telcos: AT&T down just 1.31 per cent and Verizon down 3.7 per cent. So much for the horrors of net neutrality.

The rest of the changes are largely the ebbs and flows of big tech companies. IBM's poor results this week, for example, have pushed its share price down 11.15 per cent. The worst in the group – Western Digital – also had the sad moniker of being the second-worst performing stock in Nasdaq for 2015. But its decline is about the whole storage market, not specifically tech stocks.

Hewlett Packard continues to be a hot mess as it tries to figure out, like IBM, what on earth it should do going forward. But the big confident monsters like Google and Apple are moving forward – declining less than the market at around seven per cent.

3. The sexy new-tech stocks are also in trouble

We wrote a list of the poster-boys of the new-tech economy and came up with: Facebook, Groupon, Linkedin, Pandora, Twitter, Zynga.

As a group they have had a 19.67 per cent decline in share price since the start of the year – far worse than the broader market and also worse than the most recent tech IPOs. With the exception of Facebook – which appears to have figured out how to do mobile and so has fallen only 9.93 per cent – the rest look dangerously weak.

Pandora of course faces increasing competition and recently had to deal with an increase in the fees it has to pay out, and that helps account for part of its 29 per cent fall. But Pandora also feels very much like a tech luxury. If the company disappeared tomorrow, everyone would simply switch to Spotify or Apple Music or one of the other many music streaming offerings.

Groupon and Zynga perhaps best capture the exuberance of the new-tech market and are in one respect established names in it, which makes their falls of 22 and 16 per cent this year alone a little concerning.

In short, it looks like 2016 is shaping up to be the year of reckoning for new-tech stocks. While everything is booming, optimism can fuel popular products and services. But when things start slowing down, if you can't show long-lasting prospects and profits, it gets a little trickier.

Which is of course why we will continue to see lots of articles about Twitter. The company is desperate to figure out how to make money from its service, and so far its solution each time appears to be to move away from its unique position in the market – as the provider of short, snappy communication.

Unless Twitter figures out how to profit from the speed of its own technology, it could end up this generation's Geocities. ®

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Stocks we reviewed:

• 2015 IPOs: Apigee, Atlassian, Box, Etsy, First Data, Fitbit, GoDaddy, Match Group, Pure Storage, Shopify, Square
• Big tech: Amazon, Apple, Arrow Electronics, AT&T, Avnet, CenturyLink, Cisco, Comcast, Computer Sciences Corp, eBay, EMC, Emerson Electric, Google, Hewlett Packard, IBM, Ingram Micro, Intel, Microsoft, Oracle, Tech Data, Texas Instruments, Verizon, Western Digital, Xerox
• New-tech: Facebook, Groupon, Linkedin, Pandora, Twitter, Zynga