I recently saw a post here asking about today’s IPOs versus 1999. This was published in The Information’s Newsletter and lays out some of the key differences:
Party Like It’s 1999
If there has been one way to get laughed out of a room in Silicon Valley these past few years, it is to draw comparisons between the present day and the frothy late 90s.
Do so, and you are likely to get a lecture on all the reasons why the current tech “boom” in no way resembles the tech “bubble” that burst nearly two decades ago. For starters, today’s tech companies are global behemoths with orders of magnitude more revenue than flameouts like Pets.com. We aren’t seeing the same run-up in IPO prices that we did during the late 90s. Tech, media and telecom stocks represent about 32% of the S&P vs. 45% in early 2000.
2019 is not 1999. But there is no doubt we are in a different bubble of sorts, and it’s time we recognized it. Because, while today’s tech companies don’t face the same risk of simply vanishing, they are burning through incredible amounts of cash, often with a story, but no evidence, about how they can reach profitability. The idea that SoftBank’s $100 billion Vision Fund, the one perpetuating these losses by funneling capital into money-losing companies before they go public, might itself go public without yet seeing stable returns on its investments is alarming.
Today’s newly public tech companies have a lot of runway because they have raised billions in the private markets and are raising big sums through their IPOs too. With interest rates now stabilizing, the market has bounced back; the party could continue for a little while.
But even so, we’re in dangerous times. Any macro economic event could undermine confidence and bring everything tumbling down. And it’s hard to estimate how long companies’ cash will last when many are burning more year over year. Businesses are going to have to adjust their business models and cost structures dramatically, and some investors will suffer.
Uber spent $2 billion more in cash last year than it took in in revenue. Lyft burned through $980 million. Yet investors are valuing Lyft at seven times 2018 revenue. If Uber goes public around $81 billion, it will be valued at slightly more than seven times.
While those multiples aren’t crazy, they are risky for companies that are far more capital intensive than traditional tech companies.
That’s especially true of WeWork, which publicly announced its IPO preparations were well underway this week. The company last year lost more than it took in in total revenue—with a net loss of $1.9 billion on $1.8 billion in revenue. That is some serious money.
In some cases, the companies would like investors to believe that their losses can be erased quickly when they “decide” to become profitable and stop competing for market share. The only problem with that theory—which Uber, Lyft and their investors have been saying for the better part of a decade—is that the companies aren’t supporting it with any data. Many businesses remain races to the bottom with thin margins. Just ask the airline industry.
It’s not like growth is going gangbusters either. Uber’s ride-hailing business grew revenue 33% last year, down from 95% growth the year before. Revenues for Uber Eats, the supposed fast-growing second business for Uber, fell between quarters in 2018. Airbnb, which is expected to go public later this year or early next, has told investors that it conservatively expects to grow revenue 25% this year, down from 42% last year, Cory reported recently.
Even the profitable exceptions bear closer scrutiny. The team at Zoom has managed to grow what is a pretty basic video-conferencing feature to $330.5 million in revenue. But folks, it is still video conferencing, which is highly competitive and somewhat of a commodity. Its market cap is two-thirds the value of Twitter.
Perhaps some of these fears are already lowering expectations. Lyft is trading 13% below its IPO price. Remember when Uber was expected to go public at a valuation of $120 billion, according to what people close to the company leaked to the press? When the moment finally comes, expected at the end of next week, it is looking like it will be closer to $81 billion.
Indeed, it is starting to feel like this rush of IPOs is being fueled more by fear that the money is going to dry up than by the sense that they are strong enough to face the scrutiny of being public companies.
And that is never a good sign.