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High-Flying Tech Unicorns Will Get Wings Clipped

The private-market value of high-flying “unicorns” is certain to fall as the recent rout in stock markets and the continued weakness for initial public offerings take their toll. Lowered valuations reverberate in several ways, often leading to a slowdown in funding needed to keep companies afloat and also causing highly valued employees to head for the exits, several analysts said. Unicorns are privately held companies with valuations of $1 billion or more. CB Insights counts 152 of them, with a combined valuation of about $532 billion in the latest tally. But just like the value of a home for sale is not certain until it’s actually sold, the same is true of private companies. “The reset of unicorn valuations is not showing up just yet, but the conversations are happening,” said Anand Sanwal, CEO of CB Insights, which tracks IPO investing and unicorns. “We hear that companies are being advised to raise money sooner than later, as the capital available now may not be there in six months,” he said. The largest unicorn is Uber, the San Francisco-based ride-hailing company with a market valuation reported to be near $65 billion after completing a $2 billion funding round in early December. Following Uber is Chinese smartphone company Xiaomi, valued at $46 billion. Then comes accommodation-services provider Airbnb at $25.5 billion. Other high-profile unicorns include Snapchat, Spotify and Pinterest. There are various ways a company’s valuation is rated. A common method is tracking the market value of similar companies listed on stock exchanges. When their value falls, investors devalue their private counterparts. Valuations are based on the company’s latest funding round, which can vary in length from about one year to 18 months. The impact of the latest stock market crunch and weak IPO market is not yet baked in, but it’s coming. Last Friday, for example, Big Data analytics software maker Tableau Software ( DATA ) crashed nearly 50% after reporting fourth-quarter earnings that contained a weak Q1 outlook. Tableau’s report sank the stock of other Big Data companies, such as Splunk ( SPLK ), Qlik Technologies ( QLIK ) and Hortonworks ( HDP ). “The big drops we’ve experienced in the public markets will reach into the private markets, which is typically followed by a contraction in funding,” said Kathleen Smith, a principal at Renaissance Capital, which manages two IPO-focused ETFs. “The pure size of the private company valuations we’ve seen is unprecedented and not sustainable.” Lowered valuations have reportedly emerged in some areas. Jawbone, a provider of fitness tracking devices, last month said it had raised $165 million in funding at a reported valuation of $1.5 billion, or about half what it was valued at in 2014. The lowered valuation comes as fitness tracker Fitbit ( FIT ), which came public in June at a price of 20, closed Tuesday at 14.30. Also last month, Foursquare said it raised $45 million in a new round of venture funding. A report by the New York Times said Foursquare’s valuation was roughly half of the approximately $650 million that it was valued at in its last round in 2013, as it tries to bolster its location-data-based advertising businesses. As to how or when unicorn investors will get a return on investment, the IPO market is no place to look for that now. The IPO market in 2015, coming off two robust years, fell to a six-year low in the number of companies going public. There were no new issues in January, with just two in February thus far. “Pure and simple the IPO market is miserable,” said Scott Sweet, senior managing partner at research firm IPO Boutique. “IPO underwriters are in the most precarious situation we’ve seen in years. It’s the IPO buyers that are pricing these deals, not them.” One example is payment processing company Square ( SQ ), which debuted Nov. 19 at 9 a share, well below its expected range of 11 to 13. Square stock closed Tuesday at 8.62. “We need to see not only the market improve for all stocks, but especially for the few IPOs able to make it out now. If they don’t, it will close the IPO pipeline like a padlock,” said Sweet. The valuations of recent tech IPOs have been sharply cut. Security firm Rapid7 ( RPD ), which priced at 16 in July and peaked above 27 on its first trading day, closed Tuesday at 9.46. Hortonworks, which had a December 2014 IPO price of 16, closed at 7.43. Sharp declines have hit dating firm Match.com ( MTCH ) and data storage firm Pure Storage ( PSTG ). Action camera maker GoPro ( GPRO ), which came public in June 2014 at 24, closed at 11.39 Tuesday. “Spotify, Snapchat, Pinterest, name after name — they would not IPO in this market,” said Sweet.

Tableau Tumbles On Microsoft Rivalry; Software Stocks Down Hard

Tableau Software ( DATA ) stock lost nearly half its value Friday, as investors reacted to weak first-quarter guidance late Thursday and the rise of Microsoft — and possibly Amazon.com — as a top rival in analytics, while enterprise software spending overall seems to be easing. Microsoft ‘s ( MSFT ) new PowerBI data-analytics software product, irresistibly priced for free against Tableau’s premium-priced product, won’t necessarily affect only Tableau’s campaign. Rival Workday ( WDAY ) stock was down 14% and Salesforce.com ( CRM ) was down 12% in midday trade in the stock market today . Security software stalwart Palo Alto Networks ( PANW ) stock was down 11%. Tableau stock, though, was down 49% as its outlook for this quarter and the full year lagged far below Wall Street expectations. Wall Street analysts, who were mostly upbeat about Tableau a day earlier, raced to downgrade ratings or reduce price targets. “Tableau reported revenue that beat consensus by only 1% (lowest ever), or about $2 million, when the average beat over last 11 quarters is around $11 million,” Summit Research analyst Srini Nandury said in a research note. Summit slashed its price target on Tableau stock to 45 from 80, and maintained a hold rating. “Given that the company pulled down guidance for 2016, we believe Tableau is in the penalty box for the foreseeable future,” Nadury said. “We remain on the sidelines given our belief that 1) comps will get tougher from these levels; 2) competition continues to materialize” with Qlik Technologies ( QLIK ), MicroStrategy ( MSTR ), Salesforce.com, Amazon.com ( AMZN ) and Microsoft “all gunning for a piece of the action; 3) the market may not be as big as some on the Street believe as most Excel users (as Tableau targets) would never need a visualization function; and, 4) low-hanging fruit already has been picked.” Tableau said it added more than 1,000 employees, many of them in sales, in 2015 and now has a total workforce of 3,000-plus. But Kelly Wright, executive vice president of sales, is leaving by year’s end. Responding to an analysts’ question, on the company’s earnings conference call, about her departure amid the sales force buildup, management downplayed the transition. When her retirement was announced in January, CEO Christian Chabot said, “Kelly has provided the sales leadership we needed and built a world-class sales team.” She was Tableau’s first salesperson in 2005. Business-intelligence software maker Splunk ( SPLK ) was down 25% midday Friday, while Qlik was down 15. Microsoft stock was down 2%.

Tableau Software Stock Crashes On Weak Guidance, Amazon Threat

Tableau Software ( DATA ) late Thursday posted Q4 earnings minus items and sales that beat expectations, but shares were down more than 35% in after-hours action amid signs that Amazon.com ( AMZN ), Microsoft and others were grabbing Big Data market share. Tableau’s outlook for the current quarter missed Wall Street views, at least one analyst said Q4 licensing revenue missed and at least one analyst said the Q4 sales beat lagged many analyst expectations. Tableau reported earnings minus items of 33 cents, down 21% from the year-earlier quarter but well ahead of the 16 cents expected by analysts polled by Thomson Reuters. But Tableau’s net loss, using generally accepted accounting principles, soared to 57 cents a share from 27 cents. In its earnings release, the maker of Big Data analytics software said its Q4 “tax expense was $34.1 million due to the recognition of a valuation allowance. We believe that it is more likely than not that the benefit from our U.S. federal and state deferred tax assets will not be realized. In recognition of this risk, we have provided a valuation allowance of $46.7 million on the deferred tax assets relating to these jurisdictions.” Q4 revenue rose 42% to $202.8 million, $2 million above analyst estimates, but “the buy side was looking for sales upside of $20 million-plus,” William Blair analyst Bhavan Suri wrote in a research note emailed after the earnings release. License revenue rose 31% to $133.1 million in Q4, but Global Equities analyst Trip Chowdhry said the missed Wall Street expectations and indicated the “market is moving away from (Tableau) products, to alternatives like (Amazon.com’s) AWS QuickSight,” financial news site Benzinga reported. Tableau also gave weak revenue guidance for Q1 and 2016. In the company’s earnings conference call with analysts, Tableau CFO Tom Walker guided Q1 to an 8- to 12-cent loss per share minus items, worse than the 6-cent gain expected by analysts. Walker guided revenue at $160 million to $165 million, up 27% at the high end but well below the $179.5 million analysts expected. For the year, Tableau sees revenue of $830 million to $850 million, up 30% at the high end but short of the $871 million analysts expected. Its EPS outlook also missed. In an email, Summit Research analyst Srini Nandury reminded IBD that he’d warned that “Tableau is perceived as expensive.” in a post-Q3 research note. “We have data and have heard anecdotally that the Tableau solution is the most expensive in the market when compared with” products from rivals Microsoft ( MSFT ) and Qlik Technologies ( QLIK. ) “It would not be a surprise if (Microsoft’s) PowerBI finds greater traction with Excel users, precisely the same users Tableau is targeting,” Nandury said. In a subsequent phone interview, Nandury told IBD “the company is going to remain in the penalty box for a long time to come, basically because they blew up in such a massive scale. They have not only guided down Q1 but they also guided down the full year. “Microsoft is giving away their software for free. Amazon is coming up with their own … our thesis on the stock has always been that Tableau is a one-trick pony.” In a Jan. 15 research note, Nomura analyst Aashiv Shah warned of competition faced by Tableau and Qlik from Microsoft: “Competition is increasing, with (Qlik) partners noting increased customer interest in Microsoft’s Power BI, which is a freemium product and sells at a cheaper price compared to Qlik and Tableau. While Power BI continues to lag Qlik and Tableau in terms of user experience and functionality, its lower price point could eventually lead to pricing pressure in the analytics market.” Tableau stock was 36% in after-hours trading, after rising nearly 3% in Thursday’s regular session. Tableau also competes with much-larger Oracle ( ORCL ), Splunk ( SPLK ) and others. Shares of both Splunk and Qlik were down 11% after-hours Tableau is spending heavy to compete. Research and development costs in Q4 soared 155% vs. the year-earlier quarter, to $17.9 million, while sales and marketing costs rose 135%, to $13.9 million. The company said it hired more than 1,000 employees in 2015, bringing its headcount to more than 3,000. It also opened seven new offices in the year, bringing the number of total offices to 16 worldwide. “In Q4, a record 3,600 new customer accounts chose Tableau, bringing our total to more than 39,000 worldwide,” Tableau CEO Christian Chabot said in the earnings release. “This speaks to the immense popularity of Tableau’s products and continued strong demand from customers around the world.”