In the week that Nasdaq reaches an all-time high and Trumps favorite app, Twitter, jumps 20%; let's take another look at the sector and its valuation methodology & models.
Okay, so it begins with an idea that addresses something big - say transport services. Then an app is built around it, and the wonders of technology are capitalized to realize this idea. Subsequently, the idea is sold to the market at disruptive prices. And by disruptive, it means selling a US$10 bill for just US$5.
So, it comes out as a reasonably good deal to the market – excellent value and the efficiency of technology. It hits the street and the word gets out. People will start flocking in droves. Adoption comes really fast.
Now that idea becomes a way of life, an everyday buzzword, an app on your smartphone you could not live without (well for the most of us).
Then we do the maths. That transport service app was able to make 1 million bookings in a year. That is about US$50 million in revenues. And what about profits? Well, it lost about US$10 million. But does it matter? Revenue and market growth are doing wonderfully, and happy customers keep on coming back – again and again, and again.
In the world of tech unicorns, this absurdity clearly defines what is happening to most of them – increasing growth but no profits. Our obsession for the fastest growing tech company has elevated their reputation to stratospheric heights even if they are not making any money. Today’s darling of investments, VC’s and fund managers rush to get on to the next technological wonder – even without the promise of payback.
Take Uber for example. We know Uber lost around US$1.8Bn last year on revenues of about US$11.4Bn. It has burned around US$10Bn of investors cash since 2009. We can’t wait to see its financial standing when it files for an IPO later this year.
Other tech unicorns that have made a similar filing for an IPO revealed massive financial bleeding:
- Pinterest made revenues of US$755.9 million in 2018 but with a net loss of US$63 million
- PagerDuty made US$79.6 in revenues in 2018 but had a net loss of US$38.1 million
- Lyft made a US$2.2Bn revenue in the fiscal year 2018 but had a net loss of US$911.3 million.
- Chinese ride-hailing firm Didi Chuxing lost US$585 million
- And WeWork lost US$1.93Bn in 2018 against a US$1.82Bn in revenues
These tech unicorns are not yet listed in the market, and we are not sure how the market will receive them. But one thing is for sure - it is an exit strategy for most investors who came in during its seed capital phase. Then dump it on unsuspecting investors who are buying these unicorns because of the name.
Let's all look beyond the hype and study these companies for what they truly offer. It would be nice to see some profits as a consequence of their market dominance. Otherwise, like a unicorn - it will just be one of those mythical buys whose attraction is pegged from the technological magic it offers – but the profits do not exist.