WeWork’s Lesson in Unicorn Chasing; Tesla Bears Get Crushed

The Trouble With Chasing Unicorns

I think it’s safe to say that I have a unique sense of humor. That’s putting it politely.

It’s definitely not one you find very often in the financial realm. However, the saga of WeWork has brought out the inner cynic in more than a few op-ed writers lately. I ran across a must-read piece from Matt Levine over at Bloomberg this week that you … well … must read.

I’ve covered WeWork pretty heavily in the past, so Great Stuff readers should already be familiar with this dumpster fire of a company. (If not, you can find back issues of Great Stuff online by clicking here.)

WeWork is back in heavy rotation in the financial media this week because SoftBank, WeWork’s biggest financier, is buying the company out. The valuation of that buyout? About $8 billion. That’s down drastically from the $47 billion valuation floated just ahead of the company’s failed initial public offering (IPO).

As Levine points out, SoftBank has already dumped more than $18.5 billion into WeWork. Now it’s vomiting up another $9.5 billion on a company it only values at $8 billion. In some investing circles, that’s the definition of insanity.

But wait … $9.5 billion? Where did that extra $1.5 billion come from?

That, dear readers, is Adam Neumann’s “go-away” money. I’ll let Levine take this one — it’s just too good:

Neumann created a company that destroyed value at a blistering pace and nonetheless extracted a billion dollars for himself. He lit $10 billion of SoftBank’s money on fire and then went back to them and demanded a 10% commission. What an absolute legend.

Former WeWork CEO Adam Neumann had such control over his company (and had royally screwed things up so bad) that SoftBank decided it was worth paying him $1 billion just to make him go away.

Legend indeed.

The Takeaway:

There is a lesson to be had here. But whether Wall Street and unicorn chasers will learn remains to be seen.

That lesson: Don’t believe the hype.

It’s honestly a lesson that investors should have remembered from the dot-com bust. If something sounds too good to be true — like a “tech” real estate company valued in the billions while losing billions — then it probably is too good to be true.

Adam Neumann exploited that hype. He found a weakness in the IPO market — investors flush with cash looking for massive returns and willing to believe in pseudo-holistic crazy tech dreams — and took full advantage of it.

Taking the whole situation into account, the WeWork saga is just one mother and one dead king short of a modern-day retelling of Hamlet.

Which brings up the question: Was Adam Neumann mad or mad in craft?

In other words, was Neumann a genius or just a lucky fool?

Let me know what you think by writing in to GreatStuffToday@banyanhill.com.

Good: That’s Mr. Softy to You, Bud

Microsoft “beat virtually every metric driven by strength in Cloud, Sever & Tools and Windows Pro.” In a bullish note to subscribers, Jefferies lifted MSFT’s price target to $163 from $160 — a 16.4% upside even after today’s post-earnings rally.

Here’s a little story I’d like to tell about a software company you know so well.

It started way back in history with Microsoft Corp. (Nasdaq: MSFT), Bill Gates and big money. (Thank you, Beastie Boys.)

With last night’s earnings report, Microsoft showed why it’s the OG of Big Tech companies. Earnings, revenue, cloud revenue, operating margins and guidance all were reported above Wall Street’s expectations.

According to ratings firm Jefferies, Microsoft “beat virtually every metric driven by strength in Cloud, Sever & Tools and Windows Pro.” In a bullish note to subscribers, Jefferies lifted MSFT’s price target to $163 from $160 — a 16.4% upside even after today’s post-earnings rally.

So far, however, that post-earnings rally has only boosted MSFT by about 1.6%. Why are bulls so hesitant after such a stellar report? Two words: They’re spoiled.

Revenue at Microsoft’s flagship cloud business service, Azure, only rose by 59% last quarter. That’s down from 76% in the year-ago period.

Right now, there are software companies around the globe wishing that they had sales growth of 59%.

Clearly, 76% quarterly growth can’t last forever, and 59% growth is still amazing. But you can’t argue with investor expectations.

You can, however, take advantage of this situation and buy into MSFT now to benefit from the inevitable follow-on buying that is sure to follow Microsoft’s impressive quarter.

Better: I’ve Got Chills, They’re Multiplying!

PayPal Holdings reported earnings of $0.76 per share on a 19% surge in revenue to $4.4 billion. Payment volume jumped 25% to $179 billion.

Cash is no longer “cold” or “hard.” With the advent of fintech, cash is now red-hot and electric … it’s greased lightning!

PayPal Holdings Inc. (Nasdaq: PYPL) — probably the biggest fintech company in the world by market cap — joined the earnings fray last night with style.

The company reported earnings of $0.76 per share on a 19% surge in revenue to $4.4 billion. Payment volume jumped 25% to $179 billion.

What’s more, the company’s Venmo unit saw revenue surge 64% year over year.

PayPal also put fourth-quarter guidance above analyst expectations, with revenue set to rise 17% from last year to between $4.89 billion and $4.95 billion.

PYPL shares are breaking out on the news and were up more than 9% early in the day. More importantly, the stock broke through the psychologically important $100 to $105 area. PYPL had been trapped below $105 for most of October, and this breakout could be a sign that today’s rally has legs.

Best: Back in Black

Tesla reported a third-quarter profit of $1.86 per share on revenue of $6.3 billion.

As my esteemed publisher always tells me: “Don’t be afraid to make a bold claim!”

Last month, I was on the receiving end of one of those claims. A reader told me that Tesla Inc. (Nasdaq: TSLA) would never turn a profit again.

Don’t get me wrong — I love bold claims. The problem is that the universe sometimes comes back to bite you in the end.

Last night, Tesla reported a third-quarter profit of $1.86 per share on revenue of $6.3 billion. Now, I’m a bit of a Tesla bull, but even I was shocked at the news. Literally nobody was expecting a profitable quarter. The consensus was actually calling for a loss of $0.42 per share.

But that’s not all … Tesla said it completed its Chinese Gigafactory ahead of schedule and below cost — i.e., for 65% less than its Model 3 production facility in the U.S.

The company also said that margins improved to 22.8% and offered a very upbeat outlook for exceeding deliveries of 105,000 in the fourth quarter.

The results were so good, in fact, that Wall Street bears are starting to reevaluate their outlook on Tesla. UBS, which has a sell rating and a $160 price target, said it would review its “financial model on Tesla following the results.”

I’ve always said that demand was never an issue for Tesla. It’s always been production and profitability — and these things take time. It seems that Tesla is finally making serious headway on both fronts.

Great Stuff Reader Feedback

You talk, I listen. You Marco, I Polo. That’s the deal. It’s reader feedback time!

Let’s start off with some Star Wars appreciation. Betsy M wrote:

As [a] fellow child of the Star Wars era, I appreciated your cultural references today. May the Force be with you!

Thank you, Betsy. And also with you! (Some of you will get that.)

Now for a stock question. Steve H. wrote:

Do you think Roku stock will get back to $175 a share?

Remember that talk about bold claims? I’m about to make one.

I predict that not only will Roku Inc. (Nasdaq: ROKU) get back to $175, it will hit $200 before the end of next year.

Why?

Because Roku makes the most popular streaming device in the U.S. (and soon to be the world). Because competitors such as Comcast Corp. (Nasdaq: CMCSA) always have hidden fees or other restrictions in their “free” offerings. And because practically every streaming service in existence — Apple TV+, Hulu, Disney+, Prime TV, Netflix, etc. — simply works on a Roku device.

And we’re not just talking about device sales here. We’re talking ad revenue. Roku just dropped $150 million on a company that will make ad revenue even easier to generate.

So yes, Steve, I think Roku will get back to $175 … most likely within the next year.

Next up, quite a few of you are angry at the Federal Reserve and see a crisis forming in the market.

On the repo rate, Raymond C. wrote:

There’s a crisis brewing, for sure.

William H. said:

Lending is too liberal again. Look out, it’s too easy again like in 2008!

Meanwhile, both James L. and Sherry A. (respectively) feel the Fed needs to go now:

Do away with the Fed and require Congress to do away with deficit spending. — James

My take on this is to go Libertarian and put our money in a trust. We want to close that Fed Group out and move forward. — Sherry

I’ll agree that the Fed and Congress haven’t been up to snuff lately. The only thing we can do about either right now is go vote. Pick your poison, close your eyes and pull that lever (or push the button, bubble in the circle … whatever) and then hope something actually changes.

Finally, we’ll end on a high note. Bill S. wrote:

I am always looking for the non-hype, straight shooter perspective. I get that when I read your stuff.

Umm … “non-hype” … ha, ha, ha … Bill, please skip over that previous answer on Roku, and thanks for the kind words!