After a breakout 2015, is Amazon(AMZN) losing its luster? While its stock price is likely to tick higher, narrowing margins could weigh on investors, analysts told CNBC’s “Squawk on the Street” on Monday.
At $593.19, shares of the tech-driven retailer are 12 percent lower so far this year after a January earnings reportsent the stock tumbling. Now the company’s dominance in cloud computing is facing more competition as industry laggard Google (GOOGL) poaches customers.
Raymond James internet analyst Aaron Kessler downgraded the stock last month, calling for a price target of $655, down from more than $700.
“We’re still positive, but I would say we see the pace of margin expansion to slow,” Kessler said Monday.
While Amazon’s disruption of the retail and cloud space has been “phenomenal,” there are concerns, said Bob Peck, internet equity analyst at SunTrust Robinson Humphrey, who has a price target of $600 on the stock.
“[Amazon CEO] Jeff Bezos has recently given you several quarters of margin expansion, letting it flow to the bottom line,” Peck said. “Investors love to see that. If you look back historically, he then tends to reinvest … you’ll see margins under pressure as we go forward here.”
Peck values Amazon’s cloud business, Amazon Web Services, at $100 billion and said his research shows that the business is positioned well in spite of competition. Still, Google and Facebook (FB) are Peck’s top stock picks in the internet sector, while Kessler recently upgraded Twitter (TWTR).
Amazon did not immediately respond to CNBC’s request for comment.
“[Amazon is] going to see a little more competition on the AWS side, so I think just the perception of more competition could be a concern,” Kessler said.
Looking at the annual results of Alphabet, you could be forgiven for thinking that last year’s reorganisation of the world’s most valuable company was all for nothing.
Google, which is a subsidiary of Alphabet, dominated financially. The segment, which includes most of the best-known Google products such as its search engine, maps, Gmail, YouTube and Android, made up $74.5bn of the company’s $75bn (£52bn) annual revenue.
By contrast, every other subsidiary of Alphabetwas reported in the results as “other bets”, with a total income of $448m – and an overall annual loss of $3bn.
But just because the projects do not bring in much money, it does not mean they have no effect on the company’s performance. If anything, it is the opposite: Alphabet is now the largest company in the world not because of the money it makes today, which pales in comparison to the former reigning champing Apple, but because of the money it could make tomorrow, the day after, or in 50 years.
Buried among the “other bets” are Alphabet’s secret weapons: X projects – “moonshot” investments that could change the world.
The world of medicine could be changed forever if one of Google’s bets pays off.Calico, which stands for California Life Company, wants to “cure” ageing.
It sounds like a fool’s errand, but it only takes a small tweak in mindset to see why some might view it as a fight worth having: ageing is the single biggest cause of death and disability in the world, and yet, unlike every single other cause, it is viewed as inevitable.
A world where Calico succeeds in its goal of identifying and treating the underlying causes of ageing would represent the single greatest leap in healthcare since the discovery of antibiotics in the early 20th century. Critics point out that it would also remove one of the major factors keeping humanity from a crisis of overpopulation. But would you commit yourself to ageing and death if you could avoid it? And if not, how can you ask others to do so?
Of course, one other thing would happen if Calico’s gamble pays off: Alphabet’s profits from the medical industry would make its technology business look like small change.
Super spoons and smart eyes
These days, when we think of medicine, our minds turn to pills and syringes, in hospitals and doctors surgeries. But one Alphabet subsidiary, Verily, is taking a gamble that the future of medicine looks a lot like the future of tech.
Taking the trend of connected medical devices such as fitness trackers and implantable blood-sugar monitors to their logical conclusion, the prototypes developed by the company are gadgets that could change people’s lives for the better.
The company hit headlines in 2014 for revealing a smart contact lens, which aims to measure glucose levels in tears, permanently removing the need for invasive blood tests for diabetics. A few months later, it revealed a smart spoon: stabilised cutlery to help Parkinson’s sufferers eat.
Imagine going to the doctor’s surgery and being handed a slim black wristband that monitors your vital signs and feeds back minute-by-minute data to the GP and pharmacists so they can adjust your dosage, call you back if it gets worse – and check that you’ve been doing enough exercise.
Vitruvian Man 2.0
Not everything Verily is building is hardware. Its other major goal is to complete the “baseline study”: an attempt to map a healthy human body, in its entirety.
The project is collecting every sort of biological data possible, from genetic to anatomic, from physiological to psychological, in an attempt to build a chimeramodel of what a healthy human looks like. The short-term goal is to use the model to identify deviations far sooner than they can currently be picked up, and ultimately identify problems like cancer and heart disease when they can be prevented, rather than cured.
Not every project is as wild as trying to cure death. But even the smaller ones could alter our relationship to the rest of the world. Project Loon is one example: it represents the company’s attempt to bring internet access to rural communities through a network of weather balloons, floating in the stratosphere, acting like ultra-low-cost satellites.
The project is in direct competition with a similar plan from Facebook’s internet.org, which aims to use solar powered drones to fulfil the same goal. And if either project pays off, it will usher in a world of genuinely ubiquitous connectivity: there will be nowhere on Earth that is offline. So telling your boss “I was in the middle of the Amazon” just won’t cut it as an excuse.
Robots at home – and at war
Boston Dynamics was acquired by Google in 2013. It had initially existed largely as a contractor for the US military, developing machines that can walk on rugged terrain. The BigDog quadrupedal cargo robot was the outcome: built like an ox, and walking with an unearthly whirring sound, even in its prototype form it demonstrates unnerving surefootedness. Unfortunately, they are too noisy for the US marines, which cancelled a contract with Boston Dynamics in December.
But the company is also looking at non-military uses of its robots, and has committed to taking no further contracts from the US Department of Defense. So what’s the first outcome? Atlas, a 150kg, 1.8 metre tall bipedal robot – that can do the hoovering.
Using a human shape is pretty inconvenient in robot design, because it turns out it is quite hard to balance on two legs, but our vanity means we keep on building them anyway. And so keep an eye on Boston Dynamics for your best hope of a Google-powered robot butler in the future. Hopefully, they will have dealt with the noise by then.
And all powered by the wind
All of this technology is of little use if it is driven by carbon-belching power stations that will melt the ice caps before we even sit behind the wheel of a self-driving car. So Makani, another X project, aims to create ubiquitous wind power, available wherever the air moves.
Their current prototypes look like a cross between a kite and drone, sitting at the end of long cables circling in the air. Their lightweight construction means they can operate where a traditional windfarm cannot, and be put up for a fraction of the cost. Their height allows them to reach high winds more than 300 metres in the air.
Last September, an ex-Google employee managed to buy Google.com for $12. This week, Google finally revealed the details of how it reclaimed the rights to its own website.
It all started when the search giant accidentally put its own home page up for sale on its own web address marketplace, Google Domains. Sanmay Ved, a former Google ad sales specialist who is now an MBA student at Babson College, was perusing available website domain names late one night when he noticed Google.com was available at a price of $12 per year. Curious to see what would happen, Ved purchased it, and received confirmation that he was Google’s new webmaster, according to Ved’s LinkedIn post describing the episode.
Alas, within “a minute or so,” Google canceled the transaction, apparently realizing its error. But a few days later, Ved received an email from someone at Google, offering him a consolation prize (“in a very Googley way,” Ved wrote): A check of $6,006.13, Google disclosed in a post on the company blog Thursday. The company (which recently renamed itself Alphabet) chose that amount because it “spelled-out Google, numerically (squint a little and you’ll see it!),” according to the blog.
Ved, however, refused to accept Google’s initial reward, requesting that they donate the money to a certain charity, the Art of Living Foundation‘s center in India. Naturally, Google paid the organization double the sum. That’s a total reward of $12,012.26–though it’s unclear what that spells in Google’s numerical, uh, alphabet.
We haven’t heard too much from Google’s Project Wing, the company’s drone delivery project, but a patent filing first reported by Fast Company todaysuggests the team is hard at work figuring out to get a fleet of robots to work together to automate package drop offs. The patent, filed in October 2014 and granted just yesterday, describes a system by which an aerial drone would communicate with a robotic “mobile delivery receptacle” — a box with wheels — so a package could be delivered in a safe location and then ferried to a secure drop off point.
The box would use infrared to flag down the drone to receive the package and would most likely contain a locking mechanism to prevent people from snatching objects before they’re brought to the holding location. The secure spot could be a public pickup point perhaps similar to an Amazon Locker, a place for local delivery companies to grab packages and bring them to your door, or somewhere on a private residence like a garage. Google says this should alleviate concerns such as the drone injuring pets and destroying property or the package being stolen from someone’s porch. “Conventional aerial delivery methods do not allow for safe, secure delivery of packages to delivery locations,” the patent explains.
Aerial drones working together with robot boxes on wheels
Although it’s just a patent, this potential delivery strategy marks Google’s most concrete outline of a drone-based delivery network to date. Project Wing head Dave Vos told said in October his team wanted to launch the service in 2017, which is an ambitious time frame putting Wing head to head with Amazon’s own Prime Air drone delivery project. Of course, Google has a handful of robotics companies at its disposal after a series of secretive acquisitions in 2013, so it’s not outside the company’s wheelhouse to try and pair grounded robots with ones in the sky.
VCs have pumped up the value of the “unicorn” startups. Now tech IPOs are in trouble. Good luck getting out.
Of all the Silicon Valley IPOs in the past couple of years, Lending Club’s might have been the surest bet of all.
The San Francisco peer-to-peer lender is a star in the world of “fintech,” a growing sector made up of financial technology companies bent on disrupting the traditional banking sector. Its backers include venture capital royalty such as Kleiner Perkins and Union Square Ventures, not to mention Google (GOOG) and Alibaba (BABA). The startup’s gold-plated board of directors includes luminaries such as John Mack, the former CEO of Morgan Stanley (MS); former Treasury Secretary Larry Summers; and Mary Meeker, the one-time doyenne of Internet IPOs who is now a Kleiner partner. In other words, Lending Club (LC) had assembled a very smart-money crowd. Its much-buzzed-about offering was viewed, understandably, as a slam dunk.
In December 2014, led by underwriters at Morgan Stanley and Goldman Sachs (GS), Lending Club priced its shares at $15, above the high end of the proposed range of $12 to $14. The IPO was 20 times oversubscribed and instantly gave the company a market value of nearly $6 billion. On the first day of trading, Lending Club’s stock jumped almost 70% before pulling back to close at $23.42 a share, a one-day pop of 56%. For shareholders who got out quickly, it went in the books as another very successful offering.
Then reality set in. Lending Club’s stock peaked about a week after its IPO, at nearly $26 a share, and has been retreating ever since. Never mind that the startup delivered extraordinary financial results in its first year as a public company: Lending Club’s operating revenue was up more than 100% in the first nine months of 2015 compared with the same period in 2014, and its Ebitda, a measure of earnings before subtracting expenses such as interest and taxes, was up more than 200%. The stock recently traded around $8 a share, nearly 50% below its $15 IPO price.
Naturally, Lending Club CEO and co-founder Renaud Laplanche wishes the stock price were higher. But he’s trying to look past short-term vicissitudes. “Part of the main reason for going public was to continue to establish Lending Club’s brand and credibility,” he says. “We’re building a big company. It’s going to take a very long time, but we want to do it in the public eye with full transparency. I think from that standpoint, we got rewarded. I think the Lending Club brand is a lot more established now than it was a year ago.”
That may be true with customers and bankers, but ask any retail investor who made a bet on Lending Club at around $20 a share about the company’s brand today, and the response is likely to be a grimace followed by a torrent of vitriol.
Unfortunately the Lending Club story is not an isolated case. Time and time again during the current IPO cycle, Wall Street underwriters–egged on by ambitious CEOs, hungry venture capitalists, and favored institutional investors–have hyped one technology IPO after another. The bankers price the offerings for perfection, watch them soar on the first day of trading to deliver the coveted first-day spike, and don’t stick around to offer an explanation after the shares plunge below the first-day price. (Morgan Stanley and Goldman Sachs declined to comment for this story.)
Welcome to the world of zombie tech stocks–once-highflying IPOs wandering aimlessly in the wasteland of the public equity markets and understandably unloved by investors. Many have familiar names, such as Zynga (down about 75% from its IPO price), Twitter (down 30%), and Groupon (down 85%). Online craft marketplace Etsy recently traded 56% below last year’s price at IPO and 77% under its first-day close. Others that are less well-known–like Nimble Storage (67% below IPO price)–have been just as disappointing.
To be fair, some major tech IPOs have soared in recent years, among them LinkedIn lnkd, Tesla Motors tsla, and, after a rocky and controversial start, Facebook fb. But these are the exceptions. The detritus far outnumber the success stories, raising the question, Is the method by which companies go public as broken and inequitable as it ever was? That would certainly seem to be the case. And the problem is especially acute when it comes to tech companies for which relentless forward momentum is key not only to pleasing investors but also to attracting talent and keeping their competitive edge.
This set of facts doesn’t bode well for the current wave of talked-up technology companies in the IPO pipeline–the so-called unicorns, or private startups valued at $1 billion or more by their investors. This once-rare species of startup has proliferated lately in Silicon Valley and beyond–from headliners such as Uber and Airbnb to lower-profile newcomers like Apttus and HelloFresh. Last year Fortune identified more than 80 unicorns for a cover story on the phenomenon; by our most recent count, that number has grown to 173.
According to CB Insights, a research firm that tracks venture capital investments, private investors have plowed some $362 billion into startups in just the past five years.
That means that a tremendous backlog of potential technology IPOs is building up just as the stock market is beginning to look very wobbly after its nearly seven-year bull run. Indeed, U.S. stock indexes began 2016 with their worst first-two-week period in history. The S&P 500 fell 8% in the first 10 trading days, and the S&P tech sector underperformed the broader market by a full percentage point.
For an already weakening tech IPO market, the turbulence in stocks is a punch to the stomach. In mid-January, IPO research specialists Renaissance Capital put out a special report called “Exploring the Disappearing Technology IPO.” The trends it identified were not encouraging. From 2012 through 2014, according to Renaissance, there were an average of 36 venture-backed tech IPOs per year. But in 2015 that number dropped to 23, and only seven of those offerings happened in the second half of the year, partly because of a stock market correction in August. Though the average time from founding to IPO reached a high for tech deals in 2015, the profitability of the typical technology company going public has plunged into negative territory over the past couple of years. The median Ebitda for tech companies going public in 2015 was -$9 million.
All signs point to a continued slowdown in tech IPO activity in 2016, says Kathleen Smith, a principal at Renaissance and the company’s manager of IPO-focused ETFs. She says it won’t take long for the unicorns to feel the chill as well. “What’s happening now is just going to take the bottom out of these private valuations, many of which are imaginary,” says Smith. “And this valuation reset is going to have a very negative effect on new funding.”
It appears that a reckoning is coming in the tech world. The combined value ascribed to the 173 unicorns by their investors is a stunning $585 billion–an especially astonishing figure given that so many of them aren’t even close to profitable. Sky-high valuations–driven in part by unicorn mania and an influx of money from nontraditional (and less disciplined) venture investors–have limited the number of potential acquirers for a lot of the buzziest companies.
A number of startups may have hoarded enough capital to ride out the rough patch, but even those that survive could experience mass defections and morale-killing “down rounds.” In mid-January, for example, check-in app company Foursquare raised $45 million in new venture funding but was forced to accept a valuation of less than half the $650 million value it was given by its investors a few years ago. “I imagine there’s going to be some pivots in some business models,” says John Gabbert, founder and CEO of VC data provider PitchBook.
There is also certain to be increased pressure from the VC community for any tech company on the verge of readiness to seek the “exit” of the IPO process even as it is shrinking. But every IPO currently trading below its IPO price creates a negative feedback loop, making the odds of the average unicorn getting out a little longer every day. And it doesn’t help that the process is fundamentally rigged against them.
To appreciate the extent of the tech IPO problem, it helps to understand a bit about the IPO process itself. The system has long been designed to benefit the Wall Street underwriters and their favored clients–venture capital and buyout firms, as well as the big institutional buyers of IPOs–at the expense of individual and retail investors, who have been brainwashed into thinking they are getting their hands on the Next Big Thing.
The venture capitalists or private equity investors–who finance the company while it is private–also have a big say in the IPO process. They want to make money on their investment, of course, and generally the most they possibly can. They push the underwriters relentlessly to get the highest price possible for the IPO, securing for them the biggest profit. But near the end of the process they begin to remember that they’re not selling all their shares in the IPO. At that point they actually prefer a dynamic in which the stock is actively hyped–to generate enthusiastic demand for it–but the “float,” or the percentage of the company’s shares sold in the IPO, is kept small (say, around 15%) to curtail supply.
High demand for something in short supply leads to one outcome: a higher and higher price for the stock when it finally hits the market. That way the VCs can double dip: They can crow a bit and notch a big gain on their initial investment (perhaps even selling some shares in the offering), but can also know that they were clever in hanging on to most of their stock, especially when the stock moves up smartly on the first day of trading.
The big Wall Street underwriters set the rules of the game. “Morgan Stanley and Goldman Sachs will tell you it’s not a successful IPO unless there’s a 20% to 30% pop,” says John Buttrick, a partner at Union Square Ventures. “That’s the way they get graded with their clients: Did the stock trade up after pricing? Much of the IPO machine is focused on generating a sugar-rush spike in the trading price during the two to four weeks after IPO. After that, the market takes over: ‘Sorry, not my problem.’ They profess to take a long-term view, but the data shows post-IPO stocks are very volatile in the case of tech IPOs, and that is not a problem the underwriters try to address.”
Another important constituency for IPOs is the big institutional buyers of them–mutual fund firms such as Fidelity, T. Rowe Price, and the Capital Group. They like the first-day pop too, because that means they make money instantly. Twenty-five years ago Peter Lynch, when he was running Fidelity’s Magellan Fund, used to refer to IPOs as “sunset stocks”–as in, “the sun never sets on an IPO in my portfolio.”
Interestingly, it’s a system that has also defied innovation. In the past decade or so, some clever new ways have been created for companies to raise the equity capital they need without going the IPO route. There are now a number of secondary markets where equity capital can be raised privately and where insiders can sell their stock to new investors in order to get some liquidity in ways that were never before available. The JOBS Act, which took effect in 2013, allowed smaller companies to file prospectuses privately and raise capital much more discreetly than in the past, as a way to get some of the benefits of a public offering without the many negatives of excessive scrutiny and regulation. These changes have in fact helped enable the rise of the unicorns. And yet Wall Street hardly appears to have lost its leverage in the IPO process. If anything, the opposite is true.
The aftermath of the financial crisis–a world in which there are fewer and fewer underwriters, and many of the European banks have all but disappeared from the underwriting market–has reinforced the power of the established IPO underwriters to keep the status quo working for them and their best customers.
That means that despite the hype that still surrounds them, the growing universe of unicorns out there has little choice but to submit to the IPO cartel if it wants to raise a significant amount of equity capital. For every Uber, which seemingly attracts as much capital as it wants in the private market at increasingly stratospheric valuations, there are a hundred companies that must submit to the powers that be when it comes to raising new money.
As an example of how regular investors get the short end of this process, consider the cautionary tale of GoPro (gpro), the company behind every adventure athlete’s favorite digital camera–perfect for attaching to your head so that you can record your wild-ass snowboarding and base-jumping exploits.
Remember how cool Nick Woodman, GoPro’s founder and CEO, seemed in all those interviews that cropped up before and after his company’s IPO? When GoPro went public, in June 2014, at $24 a share, the company raised $491 million, and the lead underwriters at J.P. Morgan Chase, Citigroup, and Barclays pocketed more than $28 million in fees. Right on cue, GoPro’s stock sprinted up nearly 50%, delivering that all-important pop. Within three months, on Sept. 30, 2014, it was near $95 a share, giving the company a market value of more than $13 billion.
These days Woodman isn’t talking so much. (He declined a request to be interviewed for this story.) For months GoPro’s share price has been plummeting faster than a mountain biker on a headlong descent. In mid-January, trading in GoPro’s stock had to be temporarily halted after the company warned of disappointing fourth-quarter results and said it planned to lay off 7% of its workforce. Lawyers representing shareholders quickly slapped the company with class-action lawsuits. GoPro’s shares recently traded for less than $12, more than 50% below its IPO price.
It’s been a painful reversal. But many of GoPro’s institutional investors from the IPO probably still have fond memories of the stock. That’s because they got to buy it at $24 and watch it soar to $36–then unload it for a quick 50% gain. What’s not to like?
And if both the venture capitalists and the institutional investors are happy with the first-day pop, then the underwriters are happy too, because their biggest repeat customers are both the private investors and the big institutional investors. To be sure, their high fees–the underwriting charge in the GoPro IPO was 6%–are nice too. But the real goal is making sure that their customers are happy and do business with them again and again. At Goldman Sachs, one of the firm’s mantras is to be “long-term greedy,” and the IPO underwriting process is a perfect example of how it puts that philosophy into practice. It’s one of the few businesses in the world today that has remained virtually impervious to disruption by Silicon Valley.
William Hambrecht has been talking about changing the way IPOs are underwritten and priced for close to 20 years, since he left his firm Hambrecht & Quist (which was then sold to what is now J.P. Morgan Chase) and started W.R. Hambrecht & Co. in 1998 with the hope of upending the way the Wall Street cartel manages and markets IPOs. One of the firm’s high-water marks came early in its existence when it was one of the underwriters of the Google IPO, in August 2004. (There were 31 underwriters in all, led by Morgan Stanley and Credit Suisse First Boston.)
Eleven years on, people may no longer remember how controversial it was at the time for Google to have adopted Hambrecht & Co.’s auction strategy for what became the most important company in a generation. After conducting an online Dutch auction for the Google shares, in which investors named the price they would pay and orders were filled in the order of those who bid the highest price, the underwriters priced the Google IPO at $85 a share, below expectations. The stock closed on the first day at about $100 a share, up 17%. (In the end the lead underwriters didn’t strictly adhere to the auction strategy in its purest form.)
Experimenting with a different IPO pricing model certainly didn’t hurt Google. The tech giant’s stock is up some 1,500% from its IPO, and the company (renamed Alphabet last year) has a market value approaching $500 billion, second only to Apple’s AAPL. Its stock chart looks like one side of the Matterhorn. But very few other companies have been willing to go public the way Google did, through an auction process. (Some have, including Morningstar morn, up more than 400% from its IPO, and Interactive Broker Group ibkr, up about 50%.) Rather than a turning point, the Google IPO is remembered more as a historical footnote.
Hambrecht thinks the way IPOs are manufactured and sold remains a problem. “It really is a system that is broken,” he says. He thinks the “traditional approach” needs to change but knows that the big underwriters won’t do it, despite their understanding, intellectually, that the auction approach is a fairer system. They just make too much money as things currently stand. “The underwriters stick to the traditional approach because, first of all, it allows them to discount the pricing,” he continues. “It gives them selective allocation to their best customers. And they’ve tried to keep a knowledge advantage, so it’s really a proprietary product through the first six months or a year of the trading. All of those things enhance the profitability to the underwriter.”
He says that when, say, Alibaba pops from $68 a share to $115 a share, as it did in the first few months after its IPO, the underwriters cash in because their institutional clients have made a lot of money and pay them back in kind over time. “The people who buy it in the aftermarket are the shareholders who end up, in effect, holding the bag,” he says. Hambrecht doubts that the system will ever change unless a reform is forced on the banks legislatively (as was briefly considered after the Facebook IPO) or their vicelike grip on the large IPO business is disrupted. “It’s deeply entrenched,” he says.
In fact, Hambrecht is so resigned to the inevitable power of the name-brand underwriters that he’s decided he won’t try to fight them anymore. Instead, he’s returned to what he did once upon a time at Hambrecht & Quist: Taking smaller startups public. His latest eponymous firm, Hambrecht & Co., specializes in underwriting for companies that have valuations below the unicorn threshold and garner less interest from the big banks.
Despite the deck being stacked against them during the underwriting process, some executives at newly public companies say they wouldn’t change a thing. In this camp are James Park, the co-founder and CEO of Fitbit fit, and William Zerella, its chief financial officer.
Last June, Fitbit, a maker of fitness tracking devices, priced its IPO at $20 a share, above its indicated range. Morgan Stanley was the lead underwriter. The stock opened up 52% right away and ended up about that much, giving the company a market value of $6.5 billion and making Park nearly a demi-billionaire. In November the company completed a secondary offering, at $29 a share–below the $31.68 a share where it had closed the day before–in which 14 million of the 17 million shares sold came from its VC financiers. It was, in part, a move to reduce the downward pressure on the stock as the expiration of the six-month lockup period loomed. These days, after a poorly received new-product offering, Fitbit trades below its IPO price.
But despite the stock’s roller-coaster ride, Park and Zerella say they couldn’t be happier with how the IPO was handled. Zerella credits his bankers for the way they ran the process. “They understood our story and were very helpful in articulating it to the Street,” he says, although it also helped that Fitbit is a leader in its space and very profitable.
Park says that he and his management team were excited by the IPO and by being on the floor of the New York Stock Exchange when the stock first traded. He has no regrets about not pricing the IPO higher to get more of the offering proceeds for the company. Park says he understands the players at the table have to get their cut. “I think the worst outcome would have been for it to trade below the offering price [in the days after the IPO],” he says. “It was a delicate dance, and I feel that we struck the right balance in the price of the deal. And the pop on the first day really gave the company a lot of great momentum in the press and with employees.”
Other perks: Park says the Fitbit IPO let the world know just how profitable his company is–with Ebitda margins of around 23%–and how, despite some formidable competition from Apple and others, Fitbit remains the industry leader. He points out that Fitbit now has a currency to use for potential acquisitions and says that going public has given the company’s employees something to root for together–its stock price. “It’s been a great event,” he says. “It really cements us as a world-class company.”
Laplanche of Lending Club, for his part, tries to put his company’s IPO experience in the most charitable light. But he can’t help scratching his head about how the stock has traded since those hype-filled early weeks after the IPO. He says that if the stock hadn’t jumped past $25 a share and had just traded at around $15, there would have been less disappointment, especially for the retail investors. “That being said, if they made a long-term investment, then I’m very confident that we’re going to continue to deliver great results,” he says.
No thanks to the standard IPO process. One of the reasons behind the volatility of Lending Club’s share price is the simple matter of supply and demand. The underwriters at Goldman and Morgan Stanley argued for a float of between 10% and 15% of the shares outstanding, and in the end it was around 15%. That created scarcity value initially, leading to the coveted opening-day pop. That’s the good news. The bad news came at the end of the six-month lockup period, when the Lending Club’s VC investors started selling their shares into the market.
Whether it’s a coincidence or not, Lending Club’s share price moved from about $19 in early June 2015 to a low of around $11 three months later–in effect tracking the increase in supply of stock during the year as the venture capitalists started unloading their stakes in the company.
Laplanche, of course, understands these supply-demand dynamics. But he’s not sure less sophisticated investors appreciate the subtleties of lockup periods and floats. “It can be a bit frustrating, particularly for people who wonder, Okay, what’s wrong with the company? Is there something there that drives the stock price?” he says. “I think we’re a good case study for it because we continue to report good news after good news, so there’s really no fundamental you can point to to explain the stock performance. Really, all that’s left is supply and demand of shares.”
All indicators point to Lending Club being more than strong enough financially to soar past its post-IPO doldrums. In an increasingly tough environment for tech companies, some of its peers may not be.
Google Inc. is paying Apple Inc. a hefty fee to keep its search bar on the iPhone.
Apple received $1 billion from its rival in 2014, according to a transcript of court proceedings from Oracle Corp.’s copyright lawsuit against Google. The search engine giant has an agreement with Apple that gives the iPhone maker a percentage of the revenue Google generates through the Apple device, an attorney for Oracle said at a Jan. 14 hearing in federal court.
Rumors about how much Google pays Apple to be on the iPhone have circulated for years, but the companies have never publicly disclosed it. Kristin Huguet, a spokeswoman for Apple, and Google spokesman Aaron Stein both declined to comment on the information disclosed in court.
The revenue-sharing agreement reveals the lengths Google must go to keep people using its search tool on mobile devices. It also shows how Apple benefits financially from Google’s advertising-based business model that Chief Executive Officer Tim Cook has criticized as an intrusion of privacy.
Oracle has been fighting Google since 2010 over claims that the search engine company used its Java software without paying for it to develop Android. The showdown has returned to U.S. District Judge William Alsup in San Francisco after a pit stop at the U.S. Supreme Court, where Google lost a bid to derail the case. The damages Oracle now seeks may exceed $1 billion since it expanded its claims to cover newer Android versions.
Annette Hurst, the Oracle attorney who disclosed details of the Google-Apple agreement at last week’s court hearing, said a Google witness questioned during pretrial information said that “at one point in time the revenue share was 34 percent.” It wasn’t clear from the transcript whether that percentage is the amount of revenue kept by Google or paid to Apple.
An attorney for Google objected to the information being disclosed and attempted to have the judge strike the mention of 34 percent from the record.
“That percentage just stated, that should be sealed,” lawyer Robert Van Nest said, according to the transcript. “We are talking hypotheticals here. That’s not a publicly known number.”
The magistrate judge presiding over the hearing later refused Google’s request to block the sensitive information in the transcript from public review. Google then asked Alsup to seal and redact the transcript, saying the disclosure could severely affect its ability to negotiate similar agreements with other companies. Apple joined Google’s request in a separate filing.
“The specific financial terms of Google’s agreement with Apple are highly sensitive to both Google and Apple,” Google said in its Jan. 20 filing. “Both Apple and Google have always treated this information as extremely confidential.”
The transcript vanished without a trace from electronic court records at about 3 p.m. Pacific standard time with no indication that the court ruled on Google’s request to seal it.
The case is Oracle America Inc. v. Google Inc., 10- cv-03561, U.S. District Court, Northern District of California (San Francisco).
Written by Joel Rosenblatt and Adam Satariano of Bloomberg
White House and congressional staffers have asked Silicon Valley executives for new talks in Washington, D.C., to resolve a standoff over encrypted communication tools in the wake of the Paris terrorist attacks, people familiar with the matter said.
The approaches are among the most concrete signs of how last week’s bombings and shootings have put a new spotlight on the debate about whether American companies should be allowed to offer ultrasecure messaging tools.
There is no evidence the Paris attacks have changed technology companies’ view that strong encryption protects consumers, and that providing a way for police to eavesdrop would open the door to exploitation by criminals and repressive governments.
Late Thursday, the Information Technology Industry Council, whose members include Apple and Microsoft Corp., said in a statement, “Weakening security with the aim of advancing security simply does not make sense.”
But Apple Inc., Google parent Alphabet Inc., Facebook Inc. and others face a difficult public-relations dance, because executives don’t want to be seen as brushing off the implications of a tragedy.
“It’s not the ideal time to be out there touting the benefits of encryption,” said an attorney who has worked on encryption issues.
There is no evidence Islamic State attackers in Paris relied on scrambled communications. Some used run-of-the-mill text messages, which can be easily monitored if a suspect is known, according to French media reports.
The Paris attacks came amid an 18-month feud between Washington and Silicon Valley that began when Apple and Google released new smartphone software that the companies said they cannot unlock, even if faced with a court order.
Top U.S. law-enforcement officials have said the software would cripple some criminal investigation. Talks aimed at ensuring law enforcement access to certain messaging systems and devices reached a stalemate in the fall. Unwilling to dictate product specifications to some of the nation’s most successful companies, the administration decided not to push for a change in law.
The Paris attacks may complicate efforts to reach a near-term compromise. “There is a solution out there and there’s a way to get to it but this isn’t the month to be starting down that path,” said James Lewis, a cybersecurity expert and former Clinton administration official who has consulted with tech companies and government.
He and the Center for Strategic and International Studies, where he is a senior fellow, had planned a forum on encryption policy this fall. After the Paris attacks, he postponed it.
Since Paris, Sens. John McCain, (R, Ariz.), Dianne Feinstein, (D, Calif.) and other lawmakers have said they want to ensure investigators can access the content of encrypted communications.
Mr. McCain has aid he wants to pursue legislation.
Apple has said it would never build a government backdoor into its products, because doing so would create security vulnerabilities that can be exploited by criminals. On its website, Apple says encryption protects trillions of online transactions daily and eliminating it would expose people to many risks.
“I don’t know a way to protect people without encrypting,” Apple Chief Executive Tim Cook said last month at The Wall Street Journal’s technology conference, WSJD Live. “You can’t have a backdoor that’s only for the good guys.”
Rachel Whetstone, former head of communications and public policy at Google, said in February that governments don’t have and should not get backdoors to access Google user data because the company has a duty to keep users’ information private. A person familiar with the company’s thinking said Google’s views on encryption haven’t changed.
Even if Apple and Google could be convinced to cooperate, tech executives say there are dozens of other encrypted communication systems. Most encryption techniques are publicly known and terror organizations could build their own alternatives, they said. “The cat is already out of the bag,” added one executive.
One technology executive acknowledged mixed feelings. “While I continue to feel that outlawing end-to-end encryption would be both ineffective and a slippery slope for society, I’m also aware that I have limited knowledge of all the scary things happening in the world today,” said Ted Livingston, chief executive of Kik Interactive Inc., developer of the Kik Messenger messaging application.
The Waterloo, Ontario, company’s app doesn’t store the content of messages on the company’s servers. That means, the company says, it can only give authorities data on users, not transcripts of what they say to each other. It faced some negative publicity following reports in The Wall Street Journal and elsewhere that Islamic State operatives see this feature as advantageous and use the app.
Written by Danny Yadron, Alistair Barr, Daisuke Wakabayashi of The Wall Street Journal
Google on Thursday announced a remarkable measure that could shift the balance of power between copyright claimants and those who upload YouTube videos for purposes of parody, news reporting or other examples of fair use.
Google on Thursday announced a remarkable measure that could shift the balance of power between copyright holders and the people who upload YouTube videos that feature songs and images from others.
The measure, described on the Google Public Policy blog, will involve YouTube GOOG picking up the legal costs of certain video creators who upload clips that appear to be lawful, but who are ordered by copyright claimants purporting to control the rights to take them down.
Google did not say how much money it put in the legal fund or provide specific examples of what sort of videos would qualify for the legal shield. But in the blog post, legal director Fred von Lohman did link to a page he described as “some of the best examples of fair use on YouTube.” That page includes links to a video by the Young Turks, a progressive news site, and also to remix and commentary videos posted by both liberal and conservative political voices. Those include:
Mitt Romney’s Presidential campaign use of a clip of Barack Obama singing Al Green’s “Let’s Stay Together”
A group that opposes same-sex marriage posting a rude rant by Perez Hilton
A satire of Donald Duck confronting conservative commentator Glenn Beck
In the past, it’s been easy for those who dislike such videos to scrub them from the internet by submitting a so-called “DMCA notice”-a legal claim that obliges websites like YouTube to take down videos posted by others. While video creators can ask for the video to be restored, the process can take weeks, and does not shield them from copyright lawsuits.
Courts in such cases would likely find the videos qualified as fair use, and shield the creator from the copyright claim. But unfortunately, the litigation process is frightening and too expensive for most people-even if know they would win. The practical effect is that, since the copyright claimant holds the upper hand, the DMCA process serves as a cheap and nearly risk-free way to censor a video or other unflattering information.
The concern is not just theoretical. This summer, the adultery site Ashley Madison made spurious copyright claims in an attempt to cover up news that its user base had been hacked. And, in a famous copyright case, Universal Studios spent nearly a decade in court attempting to trying to remove a 29-second home video that showed toddlers bopping to Prince’s Let’s Go Crazy.
This is why YouTube’s announcement is a game-changer: Copyright-based censorship strategies are no longer risk free. Now, before launching an unjustified DMCA takedown, the claimant will have to weigh the risk of going up against Google and its deep pockets in a lawsuit. (The legal environment could get even more interesting in light of a recent ruling in the Prince “dancing baby” that could make it easier for fair use victors to claim legal fees from those who removed their videos).
All of this, of course, is likely to spur copyright owners, who have long accused YouTube of profiting from piracy, to gnash their teeth. Such accusations are not fair. While YouTube, in its early days, was indeed awash in pirated videos, the service has since been at the front of helping companies identify their shows, and giving them the option to take it down or make money from it.
The new legal defense fund does not change any of this. As YouTube notes, only a tiny fraction of video creators will be able to avail themselves of the fund. This means that content creators who used the DMCA to protect their rights in good faith won’t be harmed. And, most importantly, YouTube has found a way to help shut off a popular censorship tool. Everyone should celebrate this.
Google is reportedly taking a page out of Apple’s playbook and expressing interest in co-developing Android chips based on its own designs, according to a report today from The Information. Similar to how the iPhone carries a Ax chip designed by Apple but manufactured by companies like Samsung, Google wants to bring its own expertise and consistency to the Android ecosystem. To do that, it would need to convince a company like Qualcomm, which produces some of the top Android smartphone chips today using its own technology, to sacrifice some of its competitive edge. Google did not respond to a request for comment.
The discussions around Google-designed chips, which The Information say occurred this fall, originated around the company’s desire to build an “enterprise connectivity device” — possibly the Pixel C laptop-tablet hybrid unveiled in September — that would rely wholly on in-house technology. Soon, Google was discussing the possibility of designing its own smartphone chips as well, the report states. One benefit of Google’s strategy would be the ability to bake in cutting edge features into future versions of Android, like support for augmented and virtual reality, that would require more closely integrated software and hardware.
A Google-designed chip may find its way to Nexus phones first
However, finding a chip co-developer may prove difficult. Though Google may find a willing partner from the pool of low-cost Android manufacturers, that partner may not be able to produce the highest-quality chips capable of powering high-end smartphones. The high-end market, which Apple dominates, is where Android fragmentation may be costing Google precious sales. One possibility, if chip makers don’t agree to use Google designs, is requiring manufacturers of Google’s Nexus line use only its own designs — all the way from the chip to the body of the device.
Facebook posted quarterly results that topped analysts’ expectations Wednesday, as ad revenue jumped and its user base continued to balloon.
The social media giant reported third-quarter earnings of 57 cents per share on $4.5 billion in revenue. Wall Street expected the company to deliver quarterly earnings per share of 52 cents on $4.37 billion in revenue, according to consensus estimates from Thomson Reuters.
Shares rose as much as 3 percent in extended trading, which would mark an all-time intraday high.
Monthly active users, or MAUs, rose 14 percent from the previous year to 1.55 billion, as of Sept. 30. Mobile MAUs came in at 1.39 billion, and both narrowly beat analysts’ expectations, according to StreetAccount.
Daily active users also climbed 17 percent to 1.01 billion, beating the Street’s expectation of 992 million. Nearly 900 million mobile users were active daily.
Advertising revenue — the vast majority of Facebook’s sales — jumped 45 percent from the prior year to $4.3 billion. Mobile ad sales accounted for 78 percent of that, up from 66 percent in the prior year.
“We think we have the best mobile ad product in the market. We’re able to target, we’re able to measure. We have broad scale,” Sheryl Sandberg, chief operating officer at Facebook, told CNBC.
In a conference call Wednesday, she pointed to advertising traction on photo sharing app Instagram, which topped 400 million MAUs this year. Facebook is “really pleased with the marketer demand for Instagram ads,” Sandberg said.
On the call, CEO Mark Zuckerberg highlighted progress in the company’s video segment. He noted the platform now has about 8 billion daily video views.
Facebook is inching closer to a $300 billion valuation, only three and a half years since it went public. Its stock had languished below the IPO price of $38 per share for more than a year but has since rallied. Shares of Facebook have surged nearly 38 percent in the last 12 months.
“At this multiple, they’re going to have to continue to put up above 32 to 33 percent year over year revenue growth. I think if they continue to do that, the EPS numbers basically don’t matter for the foreseeable future,” Leigh Drogen, CEO of financial estimates platform Estimize, told CNBC.
Last quarter, the social networking giant said it would increase investments in areas such as Messenger, WhatsApp and Oculus to boost advertising revenue from mobile and drive future growth.
Total non-GAAP expenses rose 51 percent to $2.09 billion in the third quarter.
Earlier this week, Facebook said it was testing an artificial intelligence (AI) feature that will allow it to answer questions about a photo, a feature aimed at helping blind people “see” images uploaded to the social network.
The company has been pushing hard to develop its AI capabilities—alongside Apple (AAPL) and Google (GOOGL)—with the technology being seen as key for the future of these companies. Earlier this year, Facebook unveiled a technology called “Memory Networks” which allows a machine to perform sophisticated questioning and answering.