A Warning and lesson from history.
“ Those who cannot remember the past are condemned to repeat it”-Santayana
The year 2000.
The dot com bubble.
People saw how fast the internet was growing and went mad for tech stocks.
The frenzied buying pushed stock prices to astronomical highs.
It was a time of plenty.
A lot of money was made with little effort.
However, fundamentally speaking:
These internet companies barely made any earnings and were losing money fast.
Who can forget VA Linux? seller of personal computers installed with Linux computer operating systems.
The company went public on 9 December 1999 at an offer price of $30 (which quickly rose to $90) and had a market capitalization of $10 billion.
At the time the company had reported annual sales of $17 million and a loss of $14 million (see 2001 income statement below).
Investors had been sold the hope of owning the next Microsoft.
In subsequent years sales increased tenfold along with the losses.
Exhibit: 2001 Income statement of VA Linux
Reality finally set in:
Although companies like VA Linux were having year on year double digit sales growth:
These companies were losing money fast and
Did not look like they would turn a profit anytime soon.
This public's realization, along with the September 11 2001 attacks led to the bubble bursting and the crash of market prices.
“The more things change, the more they stay the same”-Jean-Baptiste Alphonse Karr
2019 has been the year for unicorn IPOs.
Unicorns are privately-held former start-ups with a valuation of more than $1 billion.
These valuations are based on expected future earnings (High optimism if you ask me).
Some of the high-profile unicorns that went public in 2019 include SLACK, Pinterest, Beyond Meat, Uber and Lyft among others.
Chief among the Unicorn companies are the following:
Trend of high year on year sales growth and
Growing losses
Extract from Beyond Meat Inc prospectus.
Beyond Meat produces plant-based meat substitutes. The company has a market capitalisation of $6 billion (as at 25 October 2019).
Extract from Uber technologies prospectus.
*Note that the $4,9 billion other income amount is made up of profits of $2,3 billion and $954 million from disposal of operations in Southeast Asia and Uber Russia respectively ,among others.
These are worrying signs of the times.
Companies are racing to go public with no clear pathways to profitability.
Call me old fashioned but in the olden days this would be unacceptable.
The world of 2019 is begging for these issues.
Investors are now buying hope that Unicorns will turn out to be the next Amazon.
Sounds familiar?
These companies are getting bigger and losing more money every year.
There is little view of how losses will be cut going forward.
Should these trends continue…
They will ultimately run out of money and turn to more debt and shareholders for bailouts. (SAA anyone?)
"People are trapped in history and history is trapped in them"-James Baldwin
From a value point of view:
It is very difficult to determine what these companies should be worth.
They have no impressive earnings record:
Sales are growing but so are the losses.
I was taught to first value any asset based on what its income streams can produce and not its price. Should its price be lower that its determined, Only then I could potentially buy.
What was the cause of the dot com bubble?
What happens in every bubble is an abandonment of the analysis of annual reports (financial statements in particular).
Prices go up and up.
People stop looking at the underlying business and what it can produce,
There is little inquiry as to how much earnings the companies are making, whether costs are being well controlled, free cash flows, debt levels, the honesty and capability of managements etc.
The general public, along with hedge funds and institutional investors get charmed by the runaway prices.
We have seen this played over before in the past 400 years of stock market participation.
The Tulip mania of 1637,
The South Sea company crash of 1720 where Sir Isaac Newton made and then lost a ton of money,
The gold-rush in the Witwatersrand and the birth of Johannesburg.
The booming 1920s leading to the Wall street crash of 1929,
Dotcom in 2000,
Real estate prices leading up to the 2008 financial crisis.
The December 2017 Bitcoin surge when the price peaked by $20 000.
Current 2019 Unicorn bubble.
It’s always the same song and dance -Price overruling sense.
History teaches us that things come back but they don’t always come back in the same format;
That People love to speculate.
I’d say that people are drawn to speculate
If you know someone is going to make money in a R200 stokvel
If you know someone that has made money in a R200 stokvel
Your objectivity is almost out the window
It is a fundamental human desire to not want to be left out.
This blog post is not an attempt to discourage people from buying shares in any of the above mentioned companies
In the words of Clive Roffey,
“Be very careful!”