Most of These Companies Won’t Exist Two Years From Now
This article was originally published on this site
My very first day working full-time on Wall Street was the day that Netscape went public – August 9, 1995.
I remember that day like it was yesterday… Everyone on the trading floor (not just equities, but even the bond floor) was buzzing about this stock that skyrocketed from $28 to $75 immediately, especially since the company was losing a lot of money at the time. No one had seen anything like it…
Now that I’m a grizzled veteran, I’m often asked, “What did it look like during the technology bubble?” or “What did it look like during the mortgage bubble?”
During those periods, I remember the giddy excitement of people who had gotten in early and made money – at least, on paper. During Internet 1.0, these were my friends who were working at dot-coms in New York City. Sadly, few of them were clever enough to cash in before their paper fortunes were vaporized. During the mortgage bubble, it was friends buying houses and condos in Florida and Arizona and flipping them before they were ever even built.
For the latest (mini) unicorn bubble, I think the sign of a top was when public stock mutual funds started coming in full bore. The Wall Street Journal notes that around six out of 10 mutual-fund companies now own private shares… more than twice the number of funds from five years ago.
As I saw this happening in recent years, I remember thinking to myself, “Wow, there are some smart folks at these mutual funds, but for them to be leading private-equity rounds seems like a stretch!”
Well, I think when we look back at the unicorn bubble, we will remember things like these mutual funds and WeWork and say, “That was what it looked like…”
And hopefully, as I’ll show you today, we’ll remember how we made money in the face of these catastrophic failures.
WeWork is a disaster. But it’s not the only one.
Just take a look at how the stocks of “unicorn” companies that went public in the last few years have performed…
Rather than the usual definition of a unicorn – a company that has achieved at least a $1 billion valuation in a private financing – I looked only at companies that raised at least $1 billion before going public, which I call “super unicorns.”
Removing a few Chinese companies, here’s the list of the nine companies that made the cut: Snap (SNAP), Cloudera (CLDR), Dropbox (DBX), Spotify Technology (SPOT), Pivotal Software (PVTL), SurveyMonkey (SVMK), Lyft (LYFT), Pinterest (PINS), and Uber Technologies (UBER).
Now take a look at this chart. All but two of them – Pinterest and SurveyMonkey – are down from their closing prices on the first day of trading… And four of them are down more than 30%!
The good news is that the bursting of the unicorn bubble is likely to be less disastrous for the economy than the bursting of the prior two bubbles.
And importantly, you can still make plenty of money on the short side in stocks like Slack Technologies (WORK) and Uber.
How many of these companies will even exist in two years? Is there any reason they should?
Uber is an awesome product. I use it all the time. But in the past 12 months (ending June 30) it has lost $8.1 billion! Even excluding the $4 billion that was non-cash stock-based compensation, the company still burned $3.4 billion of cash (operating cash flow losses of $2.7 billion and capital expenditures of $626 million) – and the cash burn is accelerating.
Eventually, I think Uber will likely join the likes of Excite, the Globe, boo, and Pets.com on the junk heap of history.
Similarly, I’ve used Slack’s corporate messaging software for several years, and I’m very happy with it. But a good – or even great – product does not necessarily make a great company.
Last month, the company reported earnings for the first time since its June initial public offering, which triggered a big sell-off, which has continued… The stock has fallen from $31 to about $20. Slack has a great product, but I see no limit to the downside in its shares in the near term.
The slaughter of the unicorns (and their imaginary valuations) continues…
Happy hunting!
Regards,
Enrique Abeyta
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