Chasing Unicorns

It’s the 19-year anniversary of the dot-com bust, and ironically markets are again awash in a deluge of fantastic IPOs.  This time the fantasy has gone next level and involves a stampede of mythical unicorns.  During the dot-com boom, it was unthinkable to value a pre-IPO company at over $1 billion (a unicorn). But as of 2018, there were 110 such creatures in the US (CrunchBase) and 342 around the world (CBInsights)!

The valuations seem especially surprising considering how many of the companies are also unprofitable.  There’s plenty of revenue growth, however, that’s meaningless if those revenues aren’t turned into earnings.  Any fool can sell dollar bills for fifty cents. The table below highlights a few prominent ponies in this valuation race to the top.

Unicorns Without Earnings

unicorns
*Not public as of 4/22/2019, values are estimates

The biggest, baddest steed of all is Uber.  In it’s recently filed S-1 IPO prospectus, Uber seeks an estimated valuation of $100 billion. This is despite being unprofitable and generating a -$3 billion loss in 2018. But at least Uber isn’t denying the poor performance and even spells out what to expect in its prospectus.

  • “We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
  • “We will need to generate and sustain increased revenue levels and decrease proportionate expenses in future periods to achieve profitability in many of our largest markets, including the United States, and even if we do, we may not be able to maintain or increase profitability.”  

Of course, many companies include similar generic disclosures as a way to “C-Y-A” (that’s very official terminology).  But it’s still alarming that investors don’t seem to notice or even care about the lack of earnings. According to the Wall Street Journal 83% of the companies that went IPO in 2018 were unprofitable, the highest level in decades. The previous high was set in 2000 at 81%.

Meanwhile, early private investors (those endearing venture capitalists) are keenly aware of the lopsided market opportunity and are lining up for an exit.  According to the Financial Times over 300 private US companies are currently preparing to cash out via IPOs.  To those on the receiving end, caveat emptor!

That doesn’t mean none of the IPOs will have sustained success, but there will be more Pets.coms than Amazons.  Speculation and hope are exciting, everybody loves a good fairy tale.  Just don’t chase the fairies and unicorns so far that you forget the make-believe will end.

Victor K. Lai, CFA

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