One of the defining features of the 2010s was the rise of the so-called "unicorns," i.e. privately owned companies valued at more than $1 billion. You have no doubt heard of many of them: Airbnb, Stripe and SpaceEx are just a few examples. Some of today’s most popular publicly-traded stocks started off as unicorns, including ride-sharing services Uber UBER and Lyft LYFT, to name just two. The recent market crash has intensified debate over whether the golden age for these companies is over, but is this the case?
Show me the money
Unicorns are privately-owned and highly-valued, but there is another characteristic shared by almost all of them: they are rarely profitable. During the bull market of the 2010s, large private investors were more than happy to back these loss-making businesses so long as they showed top line growth and had the "tech" stamp (even though some unicorns are only tangentially related to technology).
One unicorn stock, WeWork, spent most of 2019 dealing with disaster after disaster as it was exposed as a real estate company posting record quarterly losses even while revenues grew.
The current anxiety in markets is definitely not favourable to investment in highly-valued cash incinerators, but there is plenty of evidence that the air was going out of the bubble even before the global economy ground to a halt. Both Uber and Lyft had disappointing debuts on the public markets, with their IPOs netting much less than their executive suites had anticipated. The aforementioned WeWork didn’t even make it to the IPO stage. In fact, it can be argued that its S-1 filing (the document filed with the Securities and Exchanges Commission (SEC) in advance of an IPO) is what triggered increased scrutiny of the business.
A reverse wealth transfer
Services like Uber and Lyft are attractive to customers because they offer cheaper rides than traditional taxi companies. These models have worked, in the sense that they have attracted huge numbers of users to these digital platforms, but they haven’t worked in the more traditional sense of making money. In a sense, large investors in these companies (like Softbank’s Vision Fund) are subsidising cheap rides for consumers.
In an age of increasing wealth inequality, it has been interesting to witness a kind of reverse wealth transfer from rich investors to ordinary people via these subsidised services. However, now that the tide has really gone out and those who have been swimming naked have been exposed (as Warren Buffett (Trades, Portfolio) would say), it’s very possible that these large private investors will be less willing to front the bill. At the very least, I think that the halcyon days are probably over for "tech-adjacent" unicorns like WeWork for whom the "grow at all costs" model never really made any sense.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman: Absolute vs. Relative Performance
- Warren Buffett: Banks Are Healthy Right Now
- What Investors Can Learn From Great Traders
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
