Investors don't care that fast-growing companies are
hemorrhaging money
By John D. Stoll
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 27, 2019).
Snap Inc. posted a $310 million loss on $320 million in revenue
Tuesday, but you would have never known it from the stock
market.
As the social media company's shares were rising that day, my
colleague Christopher Mims, wondered on Twitter:
"Has there ever been a time where this many companies lost this
much money and everyone acted like it was completely normal?"
This could be asked every day. Ride-hailing company Uber
Technologies Inc., aiming to pave the way for an initial public
offering, said Friday it lost at least $1 billion in the initial
three months of 2019. Work-place messaging company Slack
Technologies Inc. published its IPO paperwork saying it lost $140
million in the last fiscal year, equal to the prior year, when
revenue was 82% lower.
Many an executive and investor has winced as shares of a solidly
profitable Blue Chip gets pummeled because guidance was tweaked or
earnings-per-share didn't quite satisfy analyst consensus. 3M Co.
is earning decent money, but shares plummeted Thursday after it
reported slower sales, job cuts and a weaker outlook.
Nary a quarter goes by when a management guru or money manager
doesn't blame the market's myopia as the reason a
research-and-development department was chopped or a marketing
budget was slashed.
In Silicon Valley, meanwhile, the red ink flows. A stable of
so-called unicorns and decacorns (startups valued at billions or
tens of billions of dollars) are going public this year. As they
do, eye-popping market capitalizations are assigned to companies
whose plan for profitability is hard to discern beyond their
willingness to spend and spend and spend on growth that promises a
profit...someday.
"Despite everything written about short-termism, we're seeing
that as long as these companies have a compelling growth story,
investors are actually telling them to not focus on short-term
performance," Jay Ritter, an IPO expert at the University of
Florida, said.
The lesson here is one that has been with us since the Dutch
invented the public company 400 years ago: Growth sells.
There's a lot of handwringing over what feels like a relatively
free pass handed to Elon Musk at Tesla Inc. or Dara Khosrowshahi at
Uber Technologies Inc. Yes, they are peddling money-losing cars or
running an unprofitable ride-hailing service. But investors love
what they are selling.
Look at a company like Lyft Inc., an Uber competitor worth about
$26.5 billion when it went public last month. The stock fell as
much as 23% during initial weeks of trading. Still, nearly all
major analysts covering the stock have overweight, outperform or
buy rating on Lyft. Their $80.70 average price target represents a
44% premium over Thursday's low.
Lyft lost nearly $1 billion in 2018, and could have been far
closer to profitability if it cut down on subsidies designed to
steal riders from Uber, or had it dialed back technology
investments. However, if Lyft did this, it wouldn't just be crushed
by Uber -- it would just be another taxi company and not a
candidate to enjoy the spoils of the expected dominance that
app-based mobility services could enjoy.
Not all sectors work like this. If an unprofitable restaurant
chain tried to build an IPO on a promise to add more stores, the
market would scoff, Mr. Ritter says, because no one will believe
that you can make money on 150 restaurants if you can't do it with
100.
What makes tech companies different? The belief that their
product has a much brighter future where revenues will eventually
rise to cover an astronomical cost base, and that they'll
eventually be freed of the cutthroat competition that forces them
to buy market share.
If this feels like a remake of a movie you've seen before,
that's because in some ways it is. More than 600 companies staged
initial public offerings in 1999 and 2000, just prior to the
dot-com bubble bursting. Only 14% of those companies were
profitable, according to Mr. Ritter's research.
The percentage of money-losing tech startups filling IPOs was
nearly the same in 2018, but Mr. Ritter says there is less reason
to panic these days.
Why so calm? Fewer startups are going public -- the median age
of an IPO'd tech company is 12 years old, compared with four in
1999; and about 80% of startups are bought by bigger companies or
other investors, compared to about half 20 years ago. That means
many of the companies actually making it to public markets are
fairly well capitalized and already have a proven business
idea.
Jeff Bezos, the Amazon.com Inc. founder who weathered the
dot-com bubble, said his company delivered a case study in how
patience can pay off. Shortly after his company surpassed $1
trillion in market value, Mr. Bezos told the Economic Club of
Washington, how he turned an online bookseller into a tech
conglomerate.
"People always accused us selling dollar bills for 90 cents and
said 'look anybody can do that and grow revenue,'" he said. Mr.
Bezos remembered when former NBC anchorman Tom Brokaw asked him if
he could even spell profit. Mr. Bezos responded,
"P-R-O-P-H-E-T."
"It's a fixed cost business and so what I could see from the
internal metrics at a certain volume level we would cover our fixed
costs, and we would be profitable," he said.
Airbnb, a decade-old company that allows users to book lodging,
often in other people's homes, is one of those companies looking
like a candidate as the next Amazon. It has grown bigger than most
hotel chains and is expected to file an IPO by 2020 with a
valuation in excess of $30 billion.
Unlike many Silicon Valley peers, the company says it is
profitable. But before it was ready for prime time, it endured
years in what Airbnb co-founder Joe Gebbia calls "the trough of
sorrow." This is a period when a startup founder considers an idea
worth funding even before there is a sizable market for it.
The moral of Airbnb's story: Don't go big too early. Irrational
exuberance is no match for the trough of sorrow.
Little-known YogaWorks Inc. is one of many companies learning
this the hard way. It billed itself as fast-growing wellness
company in preparation for a $40 million IPO in August 2017. It had
50 studios that offered affordable classes for novices to master
yogis. It looked like a reasonable bet for investors watching the
popularity of Lululemon Athletica Inc. yoga pants and no-frills
gyms like Planet Fitness Inc.
The California-based chain was bleeding money, though, and
investors were selling the stock at a 50% discount by Christmas.
Executives plowed ahead, adding about 20 more studios in high-rent
cities like Boston and Washington. By May 2018, having racked up
$25 million in losses on $56 million in revenue since its IPO, the
company backed off the costly acquisition spree to focus on
improving performance at existing locations and
MyYogaWorks.com.
Is it too late? All the humbled company can hope is that every
downward-facing dog has its day.
Write to John D. Stoll at john.stoll@wsj.com
Corrections & Amplifications Slack Technologies Inc. lost
$140.7 million in the prior fiscal quarter. An earlier version of
this article incorrectly stated that the loss took place in the
first quarter. (April 26, 2019)
(END) Dow Jones Newswires
April 27, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Snap (NYSE:SNAP)
Gráfico Histórico do Ativo
De Mar 2024 até Abr 2024
Snap (NYSE:SNAP)
Gráfico Histórico do Ativo
De Abr 2023 até Abr 2024