Investor Insights:
- WeWork announced on Monday that it was postponing going public.
- Uber and other “unicorns” still have massive debt and negative cash flow.
- But there’s a silver lining in all this.
We’ve been bombarded with money-losing initial public offering (IPO) “unicorns” in recent months.
These are startups valued at $1 billion or higher.
Some of these names with sky-high expectations (and valuations) are Peloton, Uber, Slack and Chewy.com.
And let’s throw in the almost-IPO of WeWork for good measure. The company announced on Monday that it was postponing going public following the forced departure of its eccentric CEO.
It was bound to end badly. I predicted as much to Fast Company six months ago, when Uber went public.
Typical of most of the unicorn IPOs, the company still has massive debt and negative cash flow even though it’s been in business since 2009.
I told Fast Company’s readers: “If a company can’t at least be [cash flow] positive during a decade-long bull market, with zero interest rates and the easiest of ‘easy money’ policies by the Fed … well, what further ‘help’ does it need to turn a profit?”
Since then, Uber has had its valuation chopped down by a third.
Chewy has lost a quarter of its value.
Slack, Lyft and Dropbox each are down more than 40%.
Spotify, which went public 18 months ago, is also down by more than 40%.
But there’s a silver lining in all this.
The Frog Princes of Wall Street
Wall Street’s unicorn era is over. But the thrashing of the unicorns is just what the stock market needs to keep the decade-long bull alive and kicking.
That’s because investors are learning to love another mythical creature.
Instead of unicorns, they’ve started kissing the many undervalued and long-forgotten “frog princes” of Wall Street.
You know the companies I’m talking about.
They’re not pretty and sleek.
You’ll never brag about owning them at a party.
They make boring stuff or perform boring services.
But unlike the now-dead unicorns, they also generate lots of cash flow and profits.
The Bull Lives On
The proof is in the S&P Value Index, up almost twice as much as the S&P Growth Index in recent months:
(Source: TradingView.com)
A great many investors still can’t believe it’s happening.
I’ve read articles attributing the focus on undervalued companies as a “technicality” related to tax-loss selling. Others say it’s a mere blip, a “flash in the pan” rally.
I think the transition is here to stay.
It’s also a key reason why I think the bull market can continue far longer than many might expect.
The money flowing out of the market’s unicorns is a good thing.
Investors are shifting money away from companies promising much but delivering little — to firms where the bargain price of the business is undeniable.
In other words, investors are becoming more rational.
Best of good buys,
Jeff L. Yastine
Editor, Total Wealth Insider