Unicorns And Bears
Source: Shares of Twitter Are Hitting New Lows – Bloomberg Business
Almost 2 years ago, we discussed the valuation of what we described as ‘gossip stocks‘, which referred to publicly listed businesses capitalizing on people’s insatiable appetite for social media applications. This included Facebook, Linked In, Zynga and of course Twitter. Over the past year, many other newly minted stocks in the new technology space have been dubbed “unicorn” stocks. This is a reference to the fact that while commanding laughable valuations in the private market and creating gobs of paper millionaires, actual revenues fall woefully short of expectations once they are publicly traded. So while the bankers and venture guys talk about future earnings gushers; like unicorns, no one ever sees them.
This great deflation of expectations on social concept stocks has been masked by the general buoyancy of the overall markets in the past year. Market nerds will point out that even as markets ratcheted higher and higher, there were fewer and fewer stocks making the move up. Now, all of a sudden as the general market looks creakier, the enormity of the losses incurred by holders of these unicorn issues are coming to light. Here is a short list of market capitalizations of some selective unicorn stocks as of the close today:
Issue Market cap Jan 2014 Market cap Jan 2016 Peak market cap
Twitter $48 billion $13 billion $ 51 billion
Facebook $122 billion $215 billion $ 250 billion
Zynga $n/a $2.2 billion $ 4.8 billion
Linked In $23 billion $23 billion $ 30 billion
GoPro $n/a $2 billion $ 10 billion
Tesla $ 20 billion $ 26 billion $ 35.3 billion
Alibaba $ n/a $ 17.5 billion $ 30 billion
As we note, Twitter has been one of the major losers in the valuation shrinkage metric, but other established technology stalwarts have also turned sharply lower, such as:
Apple $430 billion $ 537 billion $ 742 billion
Yahoo $ 38 billion $ 28 billion $ 49 billion
While this list is selective, they represent some pretty big write downs from their respective peak valuations. In the case of stalwarts Apple and Yahoo, they are considered bellweathers even though they are well past concept stage.
Once stocks become public, there is a lot more scrutiny on the enterprise’s viability. There’s only the hard reality of the next quarter’s earnings to justify valuation, not the extrapolation into infinity used by MBA whiz kids during the initial private to IPO stage.
Inexperienced market players may attribute the collapse in valuation as a function of an inability to execute on the part of the companies. The truth is actually much simpler. In the case of newly minted issues, they may be surprised to find out that the original valuation and extrapolated cash flows were simply made up out of thin air. That’s right, completely fabricated. As long as backers are willing to fund the companies and the bankers agree to subsequently float at an agreed upon valuation, virtually any valuation can be had; especially with new concept companies having no history. Makes sense. If you’re going to make up a number, make it a big one. Who needs Powerball, when you can just write your own ticket?
The basic premise of most unicorns is that novelty and market share are more important than profitability…which will come…eventually…they hope. In fairness, that actually did work for Amazon, a survivor of the last dot com bubble. Amazon however, actually does have a business model and it’s not entirely based on selling ads. As in all market cycles, the excesses and fluff eventually disappear, to be replaced by different versions of fluff in the next cycle. As the general market begins what looks to be a longer term retracement, there may be more than just unicorns that people should be leery of. The creature that people should really be afraid of…is the bear.
Update: Uber
Update 2: Crash of Tech Stocks