Blain’s Morning Porridge, submitted by Bill Blain
This is not going to be yet another: “Oh, look at the madness of buying Tech Stocks that don’t make any money” stories.
But, seriously…. Would you buy a company posting revenues of $1.8 bln, substantially smaller in quantum than its $1.9 bln total losses, where the CEO was once quoted in Forbes: “our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue”? In normal markets, you probably would not. You would smile, marvel at the madness of this peculiar technical age, and probably pass up on the opportunity.
But these are not normal markets. With rates lower for longer, returns being difficult to come by, stock markets moving higher by the day, the peculiar market force known as “FOMO” (fear of missing out) drives everyone to analyse the risks of not participating rather than downside risks to the issuer.
The company I referenced above has now filed for its IPO on a likely $47 bln valuation… No, it’s not Uber. It’s the other one. The property company that thinks it’s a Fintech/Work-Life-balance paradigm shift.. We will talk about them later…
The glut of recent Tech IPO’s have got a bunch of stock pickers wondering if it all means we’re approaching the very top of the Tech bubble. They suspect Uber and We-Work will be the last hurrahs before inevitable burst! Those of us who remember the peak of the Dot.Com bubble will recall the improbable pet-food companies funding at 100x multiples just before that popped.
I’m thinking: if we are at the top of the tech IPO market: excellent!!! If it makes the sector cheap then I’m in to buy more!
The success of disruptive technology, new consumption patterns, and how they have compacted and utterly changed the TAM curve (Technology Acceptance Model), has truly changed the world and provided stellar returns for investors. Look at the long-term upside from names like Facebook (a genuine monopoly), the screaming success of Amazon and what its generated for investors (and particularly Jeff Bezos), or Alphabet which dominates its space. Look what Apple has done in dominating retail with just a couple of products. These firms, and others, have genuinely changed the world and produce stellar returns. Some make loads of money. Some don’t. You would have to be incredibly dumb to dismiss them. They are investment cash cows today, and probably for some time to come.
Great ideas that profitably change the world are eminently investible – with care. Some players think the results don’t actually matter as the upside is in their price. They may be right. Price is about perceptions of the future. When the marginal cost of adding a consumer is zero, what’s not to like about companies that look and behave like monopolies?
But, while returns have been stellar, maybe its time to really assess the risks. While some companies are excellent, I doubt anything is a monopoly for long. They may change the world, but the world changes. Companies have much shorter shelf-lives today than they did in the past. The world moves fast.
Here’s just one example: Netflix has genuinely changed viewing habits. It costs Netflix nothing to add customers. Brilliant! However, the marginal cost to Disney’s streaming service of a customer watching Frozen is zero. Netflix has to pay a licence fee if its customer wants to watch it. Content is where the value is in that model.
Take a look at the other side of that compacted TAM model – how long something remains new and valuable. In Facebook’s case most folk worry about regulatory risk, but it’s about fashion – my kids only post on FB so Grandma can see where they have been. It’s hardly cutting-edge youth culture anymore. How much will Facebook make tomorrow if advertisers perceive its largely wrinklies like ourselves using it?
Amazon has built its self a fortress based on its size and spend – but basically there is nothing stopping anyone else creating a cloud-based superstore. (Except loads of money… an understanding of logistics, drones and whatever else.. That’s why I’d like Amazon to be cheaper!)
Uber and Lyft have absolutely changed the way we think about personal transport services. I’ve been taken to task for calling them taxi apps as they don’t own a single taxi or employ a single driver (a matter the unions are taking to the courts and threatening a strike ahead of the Uber IPO), and they are investing billion in autonomous and driverless vehicles that will/might make them even richer. But, they’ve both been using predatory pricing to wipe the competition to make themselves the go-to apps. Yet, any teenager knows how to arb the multiple transport apps they have access to. A few years ago, a taxi-app was a thing of wonder and magic. Today? It costs surprisingly little to set up a taxi-app – which is which is why every mini-cab company now has one. Sure, Lyft is about the future.. what future is that I wonder?
Despite assuring investors its losses will diminish, Lyft – the last big IPO, is trading 26% below where it launched last month. Second quarter revenues will be $800mm according to the company, but it lost $1.14 bln – mainly on IPO expenses and “stock based compensation”. Ah. Lightbulb moment. Guess that’s why the CEO said it was “peak losses”.
The other thing to come out from Lyft is the intense competition with Uber – no surprise. It admits competition is “extending its losses”. Uber says same thing. Uber’s IPO this week could be the largest in years, and is expected to price aggressively. But who cares, both Lyft and Uber are adding “active users” which costs them nothing, but adds to the bottom line.. (er.. what bottom line?)
In case you are still wondering the other IPO coming up is We-Work. Now, if a company whose disruptive, paradigm-shifting Tech IP is renting/buying old buildings, doing em-up cheap, and handing out free pizza and beers to tenants on a Friday, is worth $47 bln, then whoopee! I do hope it crashes the market so I can buy the good stuff cheap!
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