Today: Data shows that companies fresh off their IPOs are driving the weakness in Silicon Valley tech stocks with a recent decline of roughly 50 percent. Also: Tesla keeps the momentum headed down with a post-earnings fall.
The Lead: Newest companies are biggest losers in tech-stock downturn
The rookies are struggling.
In a stunning fall from Wall Street's grace, large Silicon Valley tech companies that went public in the last two years have lost roughly 50 percent of their peak market value, an analysis by this newspaper shows, driving down the tech sector for weeks in a slide that worsened Wednesday.
Highlighted by Facebook in 2012 and Twitter in 2013, Silicon Valley has enjoyed a surge in initial public offerings in the past two years, with 20 of the region's largest 150 public tech companies making their market debuts in that time period. Enthusiasm for the newly available companies -- dominated by social media, cloud software and security companies -- initially sent their market valuations soaring. But that trend has reversed in 2014.
Taken as a group, the 20 companies' stocks have declined 49.6 percent from their collective peak price, which was quadruple the valuation delivered at IPO time. For a comparison, the 20 largest tech companies in Silicon Valley have declined 10.7 percent from their 52-week highs.
Silicon Valley's newfound weakness has pulled the tech-heavy Nasdaq composite index down 7 percent from highs reached just two months ago, and the stock values of the valley's top 150 tech companies as a whole are off 14 percent from their high of the past year.
Brendan Connaughton, chief investment officer of San Francisco wealth management firm ClearPath Capital Partners, called the sudden, steep drop in newly public stocks a "Black Swan" event, a term popularized in a 2007 book that connotes a large, unforeseeable price swing. While there could be many causes for the downturn, Connaughton noted that hedge funds and other Wall Street investors can jump on a stock and drive it too high, then bet on it to fall when it heads back down and send it too low.
"That's the problem with being the noteworthy name in the news," Connaughton said. "You're going to get all your momentum guys on the upside, and then they're going to go bailing out, and then your shorts are going to jump in when they see (the decline) and push the stock down to unrealistic levels." Short sellers make investments betting that the price of a stock will decline.
Quarterly earnings reports are also having an effect: Investors typically react more strongly to the financial performance of young companies as they attempt to model their future, Santa Clara University professor Robert Hendershott said.
"Because there is so much uncertainty about these companies, and so much of their value is based on their potential and not what they're actually doing today, a small shift in what people expect, compounded out for years in the future, has a huge impact," Hendershott noted in an interview.
The decline has deepened this week, with FireEye and Twitter the most prominent examples.
Twitter started the week already down 47.8 percent from its peak price on Dec. 26, but has plunged an additional 21.4 percent in the past three trading sessions as workers received permission to sell their shares, which they had been barred from doing since the San Francisco social-networking company's November IPO. Milpitas network-security company FireEye, meanwhile, plummeted 22.8 percent on Wednesday, even after announcing earnings that beat expectations in many regards. That put its shares at the lowest price since going public just ahead of Twitter, in September.
Like Twitter, FireEye is also nearing the expiration of its so-called lockup, with employees and early investors able to sell their shares after May 21.
"Historically, what happened to Twitter is unusual," Hendershott said. "You don't typically see this kind of drop at lockup expiration -- it would be insane if you did, because everyone knows that the lockup is expiring. I think FireEye had a bit of a sympathy cough: If Twitter could fall so sharply not on earnings but on just a lockup expiring, that scared people, and as soon as they're scared, they're not going to wait two weeks to sell."
If that kind of stock movement ahead of lockup expirations continues, workers expecting a windfall from options will see much less, which could have serious consequences in the Bay Area.
"At some point, (the downturn) is going to have an effect in the Silicon Valley economy," Connaughton said. "House prices aren't going to rise as fast ... all those restaurants that have been monetizing all these stock grants because people have been going out to dinner -- the rollover, cascading effect is going to be true for all of Silicon Valley."
Effects are already being seen in the IPO market. One of the most prominent companies in the IPO pipeline, Los Altos cloud-storage company Box, has reportedly delayed its planned market debut due to the volatility, and it may not be the last.
"Whenever it looks like it's possible to lose money is when it becomes very easy for sentiment to swing," Hendershott said.
SV150 market report: Tesla announces a loss, stock drives lower
Tech's continuing collapse didn't have much of an effect Wednesday on Wall Street, as the Dow Jones and Standard & Poor's 500 indexes advanced, but the downfall didn't stop with the day's trading, as Tesla Motors plunged after releasing earnings.
Tesla announced a quarterly loss of $49.8 million, or 40 cents a share, on $620.5 million in sales, one year after announcing its first quarterly profit, and investors sent its stock down in late trading. The company's bottom line was hit by increased spending on a variety of projects, including Model S expansion to new countries, the upcoming Model X, and Tesla' planned Gigafactories for lithium ion battery production. While the results topped analysts' projections, Tesla' stock fell to less than $186 after closing with a 2.9 percent decline at $201.35.
Silicon Valley's biggest winner of the day was Electronic Arts, as the Redwood City video game publisher soared 21 percent higher to $33.95 after releasing earnings that easily topped expectations and showed EA to be the industry leader in sales for the newest crop of gaming consoles. Apple fell 0.4 percent to $592.33 while losing legendary PR executive Katie Cotton, and Hewlett-Packard gained 0.6 percent to $32.32 after announcing a $1 billion cloud-computing effort. Yahoo fell 6.6 percent to $34.07 after Alibaba, the Chinese e-commerce giant in which Yahoo owns a substantial stake, officially filed for an IPO. LinkedIn gained 0.7 percent to $143.37 while planning a possible expansion in Mountain View that could provide space for a lot more employees.
Up: EA, Yelp, SanDisk, LinkedIn, Applied Materials, Cisco, Intel, Symantec, HP, Gilead, Juniper, Nvidia, Oracle
Down: FireEye, SolarCity, Palo Alto Networks, Workday, Yahoo, Splunk, Zynga, Twitter, NetApp, SunPower, Tesla, Salesforce, Facebook, Netflix, Pandora, Adobe, AMD, VMware, Google, eBay
The SV150 index of Silicon Valley's largest tech companies: Down 8.24, or 0.6 percent, to 1,372.49
The tech-heavy Nasdaq composite index: Down 13.09, or 0.3 percent, to 4,067.67
The blue chip Dow Jones industrial average: Up 117.52, or 0.72 percent, to 16,518.54
And the widely watched Standard & Poor's 500 index: Up 10.49, or 0.56 percent, to 1,878.21
Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510.