Rise of the Red Unicorns
Do these money-losing IPO’s signal another melt-down coming?
A Staggering Stampede
With the IPO of The RealReal today, it’s an appropriate time to get real on the flood of companies going public with no sign of profitability (or concern for attaining it). Despite being in business since 2011 and revenues exceeding $200M last year, this couture red unicorn lost over $75M — up 55% from the prior year (WSJ). Or take Chewy which IPO’d on JUN-14 touting a massive $3.5B in 2018 revenue but with a $268M loss (BI). This performance after being in business for 8 years as well (no cute sock puppet to blame here).
Okay, but what about some of our big tech darlings?
WeWork, the company that revolutionized the market for flex office space and work culture overall, was founded nearly a decade ago, yet still lost $1.9 billion last year (on $1.8B in revenue) and its year-on-year losses doubled in the first three months of 2019. Uber no better, the company expects to lose at least $1 billion for the first quarter of 2019, on revenues of just over $3 billion. This from a decade old company that doesn’t have to buy the fleet of cars or pay full-time wages for its near 4 million drivers globally. And no lift for Lyft, who drove home a $911M loss this year.
Even our beloved binge-worthy Netflix is over twenty years old, yet still lost $3 billion in 2018 and shows no sign of profitability as it accumulates more debt to subsidize its monster spend on original content (which ironically accounts for a mere 60% of total viewing minutes). In fact, as the WSJ reports, 8 of the top 10 shows people spent the most time watching on Netflix in the U.S. last year were reruns, including old hits such as Parks and Recreation, Friends and Grey’s Anatomy. Given the news this week that NBC is pulling The Office (#1 on Netflix) in 2021 doesn’t bode well for them given the growing OTT trend.
These must just be the minority of examples, yes?
Not even close. Green unicorns are in fact the rarest breed this year (cheers to you Zoom), as we have just about matched the insane exuberance of 1999 when 86% of all IPO’s launched had ZERO profitability.
Despite this fact, Wall Street strongly rebuffs the 1999 comparison with a narrative about how much more well-capitalized and mature the current crop of IPO’s are as compared to the fledging Internet darlings of two decades ago. While that may be true, it doesn’t change their massive losses and hight debt leverage. It also doesn’t account for the significant acceleration in commodization that occurs against any innovation today. With capital barriers to entry lower than ever, intense globalization and mass consumer access via social influence, size doesn’t guarantee victory (see next point).
But scale will prevail?
Not with time as the deflater. Yes, many of these companies are global goliaths with massive market share but it has come at the expense of massive debt which is challenging to realize ROI on before the next competitive onslaught forces them to pivot and resume their “investment” cycle again. Look at Netflix, bravo to their incredible ability to pivot into a content powerhouse from being a massive DVD mailer but just as they’re gaining traction with exclusive programming, streaming competition is mounting dramatically leading to the next costly pivot. Uber is the same scenario. They still can’t charge what an actual ride is worth despite their dominance and are already in a full investment cycle to dominate the future of self-driving automobiles (as is everyone else). Hence, still no timeline to profitability in sight.
So, how will these red beasts turn green?
The answer is simple — just make up your own financial metrics to suit your narrative. Welcome to “unicorn math”. Who needs GAAP and classic EBITDA when you can have “Core Platform Contribution Profit”, “Community-adjusted Ebitda” and “Adjusted Consolidated Segment Operating Income”. Yes, with unicorn math you can turn those financial frowns upside down!
Billions in losses, suddenly become millions in profit…
Not to take away any of the seismic benefits these companies bring to our lives but at what cost? It’s fine to give leniency in profitability at launch but to grant a perpetual pass on basic financial fundamentals after decades of operation is irresponsible. Especially when the markets dole out this “unicorn privilege” to a select few while the majority of other businesses must play by GAAP rules and deliver on the core fundamentals of capitalism. It may have felt like the right thing to do in 1999 when the Internet was intoxicatingly revolutionary but that is now the norm — technology is our future and everything has technology at the core.
If only we could be unicorns too
Interesting how we consumers must live and die by our credit score which is maintained with the precision and urgency of a NASA mission. One late payment or rise in credit card debt over a certain percentage and your score could fall precipitously, casting you into a credit quarantine with exorbitant penalties and a long road back. Wouldn’t it be nice if we could all get jumbo mortgages while showing a $10M annual loss?! We could just assure lenders we’re simply scaling up a new disruptive career paradigm that will have omnichannel dominance resulting in powerful Community Based EBITDA that is much rosier than our irrelevant asset/liability ratio. If only.
As the saying went in 1999, “Don’t worry about the unit losses, we’ll make it up in volume”. Yes, we all know how that worked out.
+ CRUSH Digest
