Friday Charts: IPO Nightmare and the Downside to Record Highs

If you’re new to the Wall Street Daily Nation, here’s the rundown…

On Fridays, I embrace the adage that “a picture is worth a thousand words” and hand-select compelling graphics to put recent investment news into perspective.

All it takes is a quick glance and you’ll be up to speed.

This time, we’re sharing a fresh reminder why you should avoid Wall Street’s hottest IPOs, the single most important data point for Amazon and why it sucks to be a short seller right now. Enjoy!

Momma Told Me There’d Be IPOs Like This

Once dubbed “the most interesting tech IPO of the year” by Quartz, cloud communications company Twilio (TWLO) just crashed and burned.

Six-month price performance for TWLO

You’ll recall the company provides tools to send texts for the largest Silicon Valley apps, including Uber, WhatsApp, Box and Zendesk.

And when everyone was getting hot and bothered about Twilio’s IPO last June, I warned about the company’s customer concentration.

Sure enough, it came back to bite the company.

On this week’s conference call, CEO Jeff Lawson revealed one of the company’s largest customers, which was later confirmed to be Uber, is decreasing its usage. Dramatically.

Uber once accounted for 17% of Twilio’s revenue. But the contribution dropped to 12% in the most recent quarter, and Lawson “expects contributions to decline further.”

Facebook’s WhatsApp is another double-digit contributor, too. If it decides to reduce Twilio usage, look out below!

Of course, Twilio is just one of the many “hot IPOs” we warned about here — including Groupon (GRPN), Twitter (TWTR), Zynga (ZNGA) and Fitbit (FIT).

Here’s the key takeaway: The more enthusiastic Wall Street gets about an upcoming IPO, the more you should consider running the other direction. As we shared in early March, the most hyped offerings tend to fare the worst.

The Surprising Source of Amazon’s Profits

In previous updates, I’ve highlighted the voracious pace at which online retailing giant Amazon.com Inc. (AMZN) is gobbling up the competition.

  • In February, I shared that Amazon accounted for a whopping 43% of all online retail sales in 2016 — up from 33% in 2015 and 25% in 2012.
  • In March, I shared the impact of Amazon’s increasing dominance — a wave of more than 3,500 retail store closings.

Against this backdrop, you’d think that retail sales generate most of Amazon’s profits. But think again!

The company’s cloud computing division, AWS, which only accounts for 10% of total revenue, generates nearly 90% of the company’s operating income.

AMZN operating income breakdown

Now you know why analysts pay so much attention to growth for this “tiny” segment!

As I shared on a recent appearance on Fox Business, AWS posted solid growth of 43%. Translation: Short Amazon at your own peril.

Speaking of shorting…

Lots of Pain and No Gain

With all three major U.S. stock markets hovering at all-time highs, there should be nothing but rejoicing by investors. That is, unless you’re a short seller.

The latest analysis from Goldman Sachs reveals that the market’s most heavily shorted stocks have risen to their highest level since August 2015.

In other words, short sellers are getting clobbered by these names.

Interestingly, though, they’re not about to surrender. The data show that the proportion of shares borrowed to sell short on U.S. exchanges is climbing.

Most short rolling basket

This doesn’t surprise me, either. While some people characterize short selling as un-American, I’ve found that short sellers do the most thorough research. And they’re willing to hang tight until they’re proven right.

That means if you’re invested in a stock that’s heavily being shorted, you better make sure you’ve done your homework, too. As we all know, the tables can turn quickly on Wall Street.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

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Celebrated IPO crashes and burns. The surprising source of Amazon’s profits. Pain without the gain. Also recommended: Are you inhaling tech debris? If you’re new to the Wall Street Daily Nation, here’s the rundown… On Fridays, I embrace the adage that “a picture is worth a thousand words” and hand-select compelling graphics to put recent...