Archive: The IPO Bank Heist
The IPO Bank Heist
Last year saw a swarm of new listings on the New York Stock Exchange. The culprits. Big Tech. You might be asking yourselves the question why all of sudden we have seen a slurry of listings from some of the biggest names in the business. Think Uber, Lyft and Pinterest.
Before we delve into the possible reasoning behind such listings. Let’s set the stage for the breeding ground that has allowed big tech to flourish. The 2008 Financial Crisis left central bankers stunned and left to deal with one of the worst crashes since the great depression of the thirties. Interest rates were cut to 0% in Europe and America. Central Banks then went on with huge Quantitative Easing programs to supply the market with zero percent debt - to those most favoured by the central banks. Financial Institutions. Suddenly trillions of dollars of free money is sloshing around the world and someone needs to invest it. Fast.
Elsewhere in the tech business Apple, a business with a market capitalization of almost $1 trillion dollars, had recently launched the iPhone and the concept of apps. Programs on phones that would allow users to access a plethora of different content, media and services. The smartest guys of some of the best schools in the U.S. latched on to the new trend and began starting businesses.
2009 saw the establishment of both Pinterest and Uber. Uber becoming a global behemoth in the ride sharing sector. Wherever you are in the world, you would hard pressed to find someone who has never caught an Uber ride. Later in 2012 Uber rival Lyft was launched. Unequivocally, it was quantitative easing that allowed these businesses to access finance and launch.
Green shoots of the new global economy
By 2015, everyone has the latest iPhone, they use SnapChat, take Uber taxis and post photos on Facebook. User growth with Big Tech companies is at an all time high and they all seem to be focussing on dominating their niche at any cost.
A grow at any cost mentality. The way Big Tech funds early stage growth is through series funding. They incrementally burn through cash after each round having spent it on user growth and new market launches. Then back to the market they go. Cup in hand. Like a teenage boy who spent all of his pocket money on baseball cards and now needs money for the movies.
Investors are caught up in the momentum. The CNN propagation of Big Tech. The messiah like figures of Zuck and Bezos. The first born children. Making everything seem perfect. And they’re buying it. Why wouldn’t they? Essentially they have access to free money and no moral hazard if the investment turns sour. User growth and forecasts dangled in-front of them at investor roadshows. They cough up.Turning a blind eye to the fact they aren’t Profitable. More on that later.
They now seem like a steal. Let’s look at Lyft here. They set an IPO price range of $44 to $50 a share. Investors who got in early would have ridden the gravy train all the way up $80. (I’ll you what happened to their share price later.) A similar story with Pinterest. IPO price was set at $19 and they raised $1.6Bn. Shares are currently trading at $28. I know what you’re thinking. Price is higher. Smart investment. Wrong.
Revenue Vs Profit.
This is elephant in the room when it comes to Big Tech. All business are tasked with growth. When you start a business you have to pay for customers, staff and the cost of establishing yourself as a profitable entity. Key word ‘Profitable’. Big Tech makes money right? Well, let’s look at the figures. (Maybe you can put these stats into an infographic? Or feel free to reword it).
2017 Revenue $472.9 Million/Net Loss $130 Million
2018 Revenue $755.90/Net Loss $63 Million
2017 Revenue $1.1 Billion/Net Loss $689 Million
2018 Revenue $2.16 Billion/Net Loss $911 Million
2017 Revenue $11.3Billion/Net Loss $2.2 Billion
2018 Revenue $37 Billion/Net Loss $1.8 Billion
Billions of dollars of profit. However, you can’t overlook the millions and in Uber’s case billions of dollars in losses. From the figures you can see that both Pinterest and Uber have been reducing net losses. But, any other business who wasn’t profitable after 8 years would have had the bank knocking on a door adorned with a ‘closed’ sign. Loss making businesses cease to operate. That’s simple economics (or maybe capitalism).
The Share Price Is Up
If you were one of the ‘lucky’ few who managed to get hold of a Lyft allocation - Less than a week ago you would sitting at the bar of your golf course telling your friends that the stock you bought is up almost 100%. $80 a share up from $44/$50 is an excellent return. Buy low, Sell High - they chant.
The ride sharing giant on Tuesday reported Q1 Earnings. The first real look inside the house so to speak. In the first quarter it lost $1.1 Billion. Take a moment to think about that. Adjusted losses stood at $234 Million - largely in line with the Q1 2018. The share price nose dived to find the floor at $54 a share. Quite the rollercoaster ride for ‘investors’.
The lacklustre results of Lyft’s Q1 earnings seem to have taken the air out of the post list bull run in share prices. Uber’s recently listing saw no such bull run. Share price currently sits around $42 dollars - dipping as low at times to $40. The question is are investors wising up to the lies surrounding the true value of Big Tech. If Lyft’s Q1 results are anything to go by then, if I were an investor in Uber, I’d be rapidly losing faith.
Big Tech will always harp on about user growth. Lyft reported Q1 growth of 8%. Often as an excuse for loss making. But user growth doesn’t necessarily lead to profitability as we have seen. My personal experience. Having worked with food box start-up Hello Fresh and London based Deliveroo. Funding was always based on user growth. Money was ploughed into sales campaigns at Hello Fresh so that come next funding round the books looked good. At Deliveroo. A similar story. I had a minimum of a £20,000 a week wage bill, excluding commission for a team tasked with the single job of hiring riders. The acquisition cost of both users and staff is huge. It cannot be maintained without more debt.
More users is good for business
‘Metcalfes Law’ states that the value of a network is proportional to square number of users. Add another server to accommodate the extra users and just like that - more value. But are they actually users? Many platforms find themselves plagued with ghost accounts and dormant users. I have an Uber account. I don’t use it. I tried a new service called ‘Coil’ this week. The platform was less than responsive so I ditched it. I mean seriously ,if you looked hard enough you could probably find me on Myspace. Can you monetize that? No. Don’t be ridiculous.
As we see economic contraction, companies will be more scrutinous of advertising spend. Pinterest makes its money from advertising revenue. As a business the last place I would look if I had a dollar instead of five to spend would be them. Then we only have to look at the elasticity of these products and services, an economics term for price sensitivity in terms of demand. In this I will use economic climate as the metric. Businesses like Uber and Lyft offer a premium services to customers as they are convenient to use and make life a little easier. When the economy is booming. People have money. They are happy to spend on things to make their lives easier. When times change, many an economist state that we are expecting a global economic contraction soon, people have less money and opt for cheaper alternatives like the bus and metro. In the long run, it is difficult to see how these loss making businesses would fare if the economic environment were to change.
The Broader Cost
The difficulty is not just with the rampant loss making in Big Tech. But the broader social problem that it brings with it. Tech companies are staffed with highly intelligent, driven and ambitious individuals. The commitment of their time to ‘pie in the sky’, debt fuelled ideas creates economic inefficiencies within the labour market. The people running and staffing these businesses could be better put to work as doctors, lawyers and entrepreneurs. We need to create a strong and stable economy. Built upon a foundation of profitability. Not losses and debt.
My lamentation does not stop there. The apotheosization of Big Tech ‘Founders’, a term I cannot stand, create bad role models for the young and in an ever growing world of social media exposure, young people look upto these tech billionaires and aspire to be them. Let me break it to you - being a billionaire is not success. Being happy in your work is success. Building profitable business constitutes success. Being the poster boy for rampant debt is not success. And founders. Founders establish countries. Founders start profitable businesses. These individuals are not founders by any stretch of the imagination.
The bubble is going to burst
Without debt and fundraising rounds these businesses cannot continue to operate. A view share by economist Max Keiser - host of the financial news program The Keiser Report. He first coined the term PermaQE. A permanent quantitative printing of money. That can only lead to one thing. Money being worth nothing. He believes, as do I, that the only way these businesses can be sustained is through permanent quantitative easing programs. A favourite amongst Modern Monetary Theorists.
Bankers care about one thing and one thing only. Their fees. The long term success of banking is down to their limited exposure to portfolios and their reliance on fees. Morality goes out the window. If you can find a banker with morals who hasn’t yet jumped out of a window - I’ll gift you some of Uber’s IPO allocation. But no seriously. The entire situation screams bubble. You have the hype surrounding the initial IPO, the announcement by the puppets on CNN and CNBC, the constant newsreel exposure that fuels the hype.
We’ve, unfortunately, seen all of this before. The tech bubble burst in the early noughties. Prior to the burst we saw the same process - The creation of a sector, exponential growth, the IPO and then then the bubble bursting. It creates devastating effects on the economy. The establishment will tell you that ‘this time it is different’, akin to the alcoholic who just takes one drink.
A recent New York Times piece made a case for this bubble differing from the Dot-Com boom, in so much that on average, Big Tech has spent more time being run as private businesses and they are right. Dot-Com Boomers spent an average of 3 years as private companies before going public. Big Tech has spent an average of 10 years as private companies. They neglect to mention the difference of availability of debt during the two periods. Quantitative easing wasn’t rife in the nineties. It has been for the last ten years. I’m of the belief that if a business is private for longer then they have more to hide. It isn’t something to be proud of.
Who’s going to pay? Someone has to pay. It isn’t going to be The House of Lannister. The truth - retail investors with a hot shot broker who sold them a momentum stock. Do they expect these consistently loss making companies to miraculously make money? Alas, if we look to history, financial mismanagement of the few ends up being borne by the masses. The bail out will be funded solely by the tax-payer.
Big Tech is orchestrating the biggest bank heist in history. And they’re doing so right under your noses.