There was a lot of talk in 2019 about the failure of expensive unicorns to live up to their hype, but just how bad is the damage?
2019 is the year when investors stopped believing in Unicorns (companies with >$1 billion valuations). As the U.S. market recovered from the 2018 Q4 correction, everyone was excited to see the most valuable tech start-ups – Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), Airbnb, Pinterest (NYSE: PINS), Slack (NYSE: WORK), WeWork & Palantir go public in 2019.
Ride-hailing giants like Uber and Lyft were the worst performers. Uber lost almost one-third of its value after it listed well below its hoped valuation of $120 billion in May. Its main rival Lyft faced something similar. Uber generated $9.2bn vs. $2.1bn for Lyft in revenue for 2018, but both are still spending millions on marketing to gain market share. Investors are worried about the ability of these two of ever being profitable, the only road to profitability is if the prices are significantly increased. But that would risk losing a significant number of customers.
Slack skipped the traditional IPO routed and sold its shares straight to the public, but its prices have also dropped since then. The workplace chat app has posted a strong revenue growth in 2019, operating expenses stood at $478 million as it heavily invested in marketing, research & development. Mr. Butterfield (CEO) mentioned how they plan to spend more on marketing to persuade existing customers to upgrade their subscriptions and expand their existing customer base.
The fall of the mighty WeWork, the office rental company was the most interesting. The company was planning to go public later this year, but the plan collapsed after investors sounded alarmed over its strategic decisions and piling losses. The company was continuously fuelled by money from Softbank and was valued at a $47 billion valuation in the latest round. However, Its immediate competitor IWG was valued at just $3.7 billion with a profit of $0.5 billion in the same period.
Pinterest and Zoom (NASDAQ: ZM) rallied in their public market debuts, bringing in positive sentiment. Pinterest priced its IPO at $19, raising $1.4 billion. The stock went up to $36 in August 2019 but came shooting back down to the original IPO price recently as it failed to generate revenue from its US users. While active users grew 28% year over year, it couldn’t reap expected advertising revenues from those users.
Zoom, a videoconferencing service for businesses, priced its shares at 10x of what its private investors paid a few years ago at $36. It shares appreciated as much as 170% in July, it followed a similar path when corrected down to $64 in early December.
Shares in the New York-based fitness equipment provider, Peloton (NASDAQ: PTON) dropped more than 11% in early November. While its revenues doubled for the first two quarters as compared to last year, the losses jumped fourfold over this period to $196 million. Beyond Meat (NASDAQ: BYND) was probably the only one expected to do well throughout the year because of the rising consumer enthusiasm over plant-based protein alternatives. After a market debut at $25 in early May, the stock hit its highest point at $234 in July. Currently trading at $77, analysts believe sentiment has been the main driver of the stock price as the market saw a 47.2% short interest in the 3rd quarter.
For most of these unicorns, it’s quite clear that they burn cash to acquire customers. Most of them are able to successfully do that by securing billions in private money, but only a few of them are able to successfully able to bring these costs down over the years and become profitable. This was one of the main reasons U.S. investors disciplined the IPO market. The sluggish US economy, the U.S. China trade war worsened the situation creating a negative sentiment in the markets. This made investors shift into defensive sectors like Utilities, & Consumer Staples avoiding these high risk newly public companies.
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