Stock market investors have just taken a $275bn bite out of the world’s largest publicly traded internet companies.
The 14 companies, worth more than $20bn - five of them in Asia, nine in the US - have, in little more than a month, lost about a fifth of their combined $1.4tn of stock market value.
While the broader equity market is still flirting with record highs, some of the planet’s best-known tech companies have suffered their biggest hit since the depths of the 2008 financial crisis.
After a run that has stretched traditional valuation measures to breaking point, this may be no more than a temporary correction. But the abrupt halt to the momentum investing that drove up prices amounts to a new era for a group of companies accustomed to ever-rising valuations and the ample capital that followed.
One after another, the stock market’s highest-growth sectors have cracked and fallen. A rally in the biotech sector peaked at the end of February: since then, the Nasdaq biotech index has dropped nearly 20 per cent.
A new generation of business software companies - such as cloud-based application provider Workday, big data analytics company Splunk and security group Fireye - has fallen even harder, tumbling 30-40 per cent or even more.
Most eye-catching, though, has been the damage to large-cap internet stocks. In the past month, Chinese internet group Tencent has fallen by a fifth, meaning its valuation has sunk by HK$248.3bn ($32 billion) since March 6. South Korean counterpart Naver has lost 10 per cent while Japanese ecommerce group Rakuten has shed 7 per cent. Yahoo Japan has tumbled 26 per cent.
In the US, meanwhile, Facebook has fallen back by 22 per cent from its March high while Twitter and LinkedIn have retreated some 40 per cent from peaks that came earlier. Even Google is down 12 per cent in a month - double the decline in the Nasdaq over the same period.
Most immediately, the retreat has put a question mark over a raft of initial public offerings that had been expected to bring a new batch of internet leaders to the fore.
It has strengthened scepticism, for example, about speculative valuations of Chinese ecommerce company Alibaba that have reached as high as $200bn. Others lining up to float this year include JD.com, another Chinese ecommerce site, while Sina Corp is preparing to list its Weibo messaging service in New York. Naver is dogged by rumours it will take Line to market while rival South Korean chat app Kakao says it plans to float in Seoul early next year.
Two explanations have been advanced for the setback in high-growth stocks. One holds that this is a natural - and healthy - correction: flushing out speculative momentum investors and bringing valuations more in line with reality.
"We were due for it - we were running hot," says Hemant Taneja, a Silicon Valley venture capitalist whose investments include start-ups Snapchat and payments company Stripe. Once stock prices stabilise, the lower valuations will make life easier for companies that have yet to list, he adds.
The other explanation is less sanguine: that the balance of risk in the world has shifted. With the crisis in Crimea a new level of geopolitical risk has emerged, while the change in leadership at the Federal Reserve and signs of reviving growth in the US have stirred unease about interest rate rises ahead.
Against this background, the crumbling high-growth stocks could be "the canaries in the coalmine", says David Garrity, an analyst at GVA Research. As investors examine internet companies more critically and decide the earlier valuations were out of line, he adds, it could lead to a repeat of the 2000 tech bust.
But most tech investors and entrepreneurs argue that conditions are different from the previous internet bubble.
"Back then a lot of companies just put '.com' in their company names. . . I don't think [INVESTORS]understood what this internet thing was," says Eric Cha, an analyst at Nomura. "The internet business now has a longer track record, and the mobile space is actually an extension of that."
Tencent, for example, reported revenue of $9.9bn and net profit of $2.5bn last year, compared with $7.9bn and $1.5bn for Facebook.
There are at least some similarities with the dotcom boom, however. As then, the high valuations float on hopes of big future profits rather than today’s earnings. This time, rather than the web, it is the mobile internet feeding the expansive dreams of massive riches.
"Mobile is new territory," says Terry Chen, an analyst at CLSA. "Everyone is still in the landgrab phase, building their empires."
Nowhere has that been clearer than in the soaring valuations of chat apps - the key communications utilities of the mobile internet. Facebook’s $19bn cash-and-stock offer for WhatsApp was the high-water mark of recent valuations: with the social network’s stock price slide, the deal has slipped back to $17bn.
Shares in South Korea’s Naver more than tripled between the start of 2013 and March 10 this year, driven mostly by the success of its Line chat app. Kakao’s revenue more than quadrupled to Won210.8bn last year while net profit rose tenfold to Won61.4bn.
“You look at [valuations in the sector] from the present view and you might scratch your head,” says Sirgoo Lee, Kakao co-chief executive. But like others, he is out to prove he can turn a giant audience - in this case, 140m - into a business.
"If you read the trends, see where this thing is going...it's an investment in the future," Mr Lee says.
That is a message other internet entrepreneurs hope their own investors will respond to, before the damage to their share prices goes any deeper.
Financial Times
