Let’s not mince words here: the high growth part of the market is crashing. More specifically, any company with operating losses is being hurried down as if a credit crunch loomed. Actually, that’s exactly what is transpiring.
Just like in March of 2000, stocks dropped for the sake of dropping. After the downtrend became obvious, panic set in and people ran for the exits. Hundreds of companies went bankrupt within a year because capital markets closed for them. All of these cool high growth companies that are operating with losses will need to raise capital somehow.
How will they do it?
Without collateral, a web company can’t issue bonds.
So, they will do dilutive secondaries.
But, could you even fathom FEYE doing another secondary now or YELP? Who in their right minds would invest, unless it was priced at a 20% discount.
THIS is what is happening now. Wall Street is making a prediction that the pain we are seeing in high growth money losers will be exacerabated by the fact that they will need to raise capital, at some point in the future.
On the other hand, this sort of pin less hand grenade action could also present opportunity, especially in names that have positive free cash flow or who are on the cusp of profitability, like YELP. But I wouldn’t dare venture off into the murky waters now, as it has the stench of blood in them. I will wait to buy the blood via broad index and sell it shortly thereafter, win or lose.
This is a renters market.