October 29, 2019
Financial disasters lurk for the unwary in the markets today.
They are usually disguised as tech companies boasting a revolutionary business concept with a quirky, visionary founder.
But they will all end the same way.
Financial analyst and Wall Street hedge-fund founder Enrique Abeyta shares why in today’s American Consequences Daily update. And if you’re interested in receiving trading recommendations from Enrique, absolutely free for the next month, click here.
We’re Going Unicorn Hunting
By Enrique Abeyta, editor of Empire Elite Trader
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 this (mini) unicorn bubble, I think the sign of a top was public stock mutual funds 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… ”
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 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 (SPOT), Pivotal Software (PVTL), SurveyMonkey (SVMK), Lyft (LYFT), Pinterest (PINS), and Uber (UBER).
As you can see from this chart, all but one of them – Pinterest – are down from their closing prices on the first day of trading… And four of them are down more than 35%!
The good news is that the bursting of the unicorn bubble is likely to be much less impactful on the economy than the bursting of the prior two bubbles.
And there is still plenty of money to be made on the short side in stocks like Slack Technologies (WORK) and Uber (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.
And 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…
In his 20-plus years on Wall Street, Enrique founded and ran two hedge funds and worked at a number of others, building a track record that consistently outperformed the market and most impressively, generated positive returns through the bursting of the dot-com bubble and the financial crisis of 2008 to 2009.
And for a very limited time, American Consequences readers have a one-time offer to try Enrique’s new service for a full month, absolutely free. Click here to learn more.
Now here are some of the stories we’re reading…
Former hedge fund manager Enrique Abeyta says the digital revolution is hurting 3G’s highly leveraged companies.
The unicorn massacre unfolding today is exactly the opposite of what happened in 2000.
The collapse of the initial public offering of WeWork parent We Co. and the steep decline of Uber Technologies shares and other recent IPOs have backfired on funds that hoped big stock gains would give them market-beating performances.
CEO Masayoshi Son swooped in to take 80% control of WeWork in what amounted to a bailout of the office-sharing company after the public markets rejected it. We’ve seen this move before. Last time, the results weren’t exactly stellar.
The cliff dive by WeWork and its quixotic founder has little precedent, even in the boom-and-bust world of startups. It’s especially stark given Mr. Neumann’s boundless ambitions: He said WeWork’s mission was to “elevate the world’s consciousness” and he told people he hoped to be its first trillionaire.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
October 29, 2019