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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.

Could ‘More Nimble’ Security Rivals Swipe Qualys’ Market Share?

DA Davidson analyst Jack Andrews likened Qualys’ ( QLYS ) disappointing Q4 to the 1994 action flick “Speed.” And even Keanu Reeves and Sandra Bullock would struggle to pilot this speeding vehicle. “Qualys reminds us of an automobile driver who is trying to simultaneously replace critical engine parts while maintaining an appropriate speed limit on a busy road,” Andrews wrote in a research note Tuesday. “There are simply too many moving parts to fully support a buy rating.” Andrews downgraded Qualys stock to neutral and cut his price target to 25 from 51. At least three other analysts slashed their price targets on Qualys stock after the cloud security vendor late Monday reported Q4 and 2015 sales that missed Wall Street views. Its Q1 guidance also lagged the consensus. Qualys stock was down 23% in afternoon trading in the stock market today , hitting a 30-month low near 17. For Q4, Qualys reported 21 cents earnings per share ex items on $44.4 million in sales, up 40% and 21.5%, respectively, from the year-earlier quarter. EPS topped expectations for 17 cents, but sales missed the consensus of 16 analysts polled by Thomson Reuters for $44.6 million. Qualys ended the year with $164.3 million in sales and 70 cents EPS ex items. Current-quarter sales guidance for $44.7 million to $45.4 million would be up 20% at the midpoint, but that’s more than $1 million short of the consensus. EPS guidance for 14-16 cents missed Wall Street views for 18 cents. New Products Could Buoy Growth Last quarter was Qualys’ slowest in more than two years, Pacific Crest analyst Rob Owens noted in a research report. Owens rates Qualys stock as sector weight. Vulnerability management (VM) comprises 78.7% of Qualys’ Q4 sales and grew 18% vs. the year-earlier quarter and 19% for the year, Credit Suisse analyst Sitikantha Panigrahi wrote in a report. Noncore products — Web application scanning, policy compliance and Web application firewall — rose 35% year over year in Q4, but decelerated sequentially from 40% growth in Q3 and 50% in Q2, Panigrahi wrote. Panigrahi reiterated his outperform rating on Qualys stock but cut his price target to 35 from 45. But Summit Research analyst Srini Nandury reiterated his buy rating on Qualys stock but dropped his price target to 35 from 50. Nandury expects at least 20% near-term sales growth on new product launches this month. The new series will be based on Qualys’ ElasticSearch capabilities and Cloud Agent platform, Qualys CEO Philippe Courtot said in the company’s earnings conference call. “Many businesses are yet to deploy VM solutions in any meaningful way,” Nandury wrote in a report. “Upcoming products are expected to contribute meaningfully by year-end.” Security Stocks Hit In High-Tech Sell-Off Yet, Pacific Crest’s Owens questioned whether Qualys could maintain its VM leadership in a tough market. IBD’s 41-company Computer Software-Security industry group closed down nearly 7.2% Monday, after falling 7.4% Friday. The group was down another fraction midday Tuesday and touched its lowest point since June 2014. “We continue to believe that Qualys is beginning to cede share to smaller, more nimble competitors in their core VM space, and that others may offer a stronger value proposition with their complementary solutions and messaging,” Owens wrote. Smaller rivals include Rapid7 ( RPD ) — a $408 million market value to Qualys’ $609 million — and privately held Beyond Security, Critical Watch, Core Security, SAINT, Tenable Network Security and Tripwire. Owens added: “While everything is ‘on sale’ in this bear market, we prefer names that could offer more upside should things stabilize.” The unstable stock environment got no help last week from weak   quarterly reports from LinkedIn ( LNKD ) and Tableau Software ( DATA ). Cybersecurity competitors Palo Alto Networks ( PANW ) and  Proofpoint ( PFPT ) were recovering somewhat Tuesday, both up 1% Tuesday afternoon, but   FireEye ( FEYE ) stock was down 2.5% Tuesday afternoon, after falling 9.5% Monday.

FireEye Earnings Illustrate Why You’re More Secure With HACK

FEYE showed why owning a single cyber security stock is high risk. FEYE drug down other cyber security focused stocks. This performance supports the notion that owning HACK is a much better way to gain exposure to this industry. I am a big fan of cybersecurity companies and the potential that these stocks have as a unit to become extremely valuable over time. CyberArk Software (NASDAQ: CYBR ) is one of my favorites. Palo Alto Networks (NYSE: PANW ) is a trend-setter, and even FireEye (NASDAQ: FEYE ) is still a great company after its disappointing quarter. However, I have discussed the topic of cybersecurity stocks to members of TTS on a regular basis, and have explained that while the companies may be good, the stocks are very expensive and risky due to lofty valuations and high expectations. For this reason, there’s only one good way to invest in a cybersecurity stock. That way is to own an ETF, a basket of cybersecurity stocks rather than just one alone. My personal favorite is PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ). The reason it is important to own ETFs in these extremely volatile and unpredictable industries like cybersecurity is to protect from sudden downside. FireEye investors know all too well this risk, with FEYE down 24% after reporting earnings. FireEye’s earnings weren’t bad. The company grew revenue 45% and its margins surged due to operating expenses rising just 14%, far slower than revenue growth. However, the problem for momentum stocks like FEYE is that every metric in its earnings report is heavily scrutinized, and has the potential to move the stock in a big way. These metrics are important to maintain the lofty valuation that has been given to such stocks. Therefore, investors showed quite a bit of fear when FireEye reported that billings grew just 28% year-over-year and that its product revenue rose only 24%. These are both signs that future subscription growth could decelerate, as could overall revenue growth. Not to mention, its conservative outlook didn’t help matters much. Nevertheless, FireEye’s earnings performance and its stock collapse dragged competitors down with it. PANW fell 4%, Rapid7 (NASDAQ: RPD ) stock fell 5%, and Fortinet (NASDAQ: FTNT ) also fell 5% in response. However, those losses weren’t nearly as bad as FEYE, and had investors owned PANW, RPD, or FTNT they would still have exposure to the growth of cybersecurity without the big, portfolio changing drop that took place in FEYE on Thursday. As previously said, the answer is an ETF, specifically HACK. What I like so much about HACK is that it’s an ETF that tracks the performance of companies across the globe that are service providers for cyber security companies or provide cyber security services. In other words, all of the components have a connection to cybersecurity. Furthermore, no stock’s weight is greater than 5% of the ETF. With that said, HACK tracks PANW, FEYE, RPD, and Proofpoint (NASDAQ: PFPT ) among others, but it also tracks Juniper (NYSE: JNPR ), Cisco (NASDAQ: CSCO ), and providers of cloud security or cloud storage & security. Collectively, HACK fell 2.7% on a day when cybersecurity focused stocks fell far more, and FEYE lost a quarter of its stock value. Therefore, HACK investors get the exposure to cybersecurity and security in general without the risk that comes with owning one particular stock in this arena. With HACK trading higher by 7% over the last 12 months, it has greatly outperformed the 3.8% gains in the S&P 500. Moreover, spending on IT security is expected to grow at a compound annualized rate of 7% until becoming a $101 billion market in 2018, and the global cyber security market is figured to grow at a compound annualized rate of nearly 10%, exceeding $170 billion by 2020 according to Gartner. These industries are growing far faster than GDP, and suggests that HACK will continue to outperform major indexes in the years ahead.