Posts tagged ‘BlackRock’
Dying Unicorns
Historically, when people speak about unicorns they are referring to those magical white horses with long horns sprouting from their foreheads. Today, in Silicon Valley and on Wall Street, “unicorns” refer to those private companies valued at more than $1 billion. The current list of unicorns is extensive, including household names like money-losing Uber ($51.0 billion valuation), Airbnb ($25.5 billion), SnapChat ($15.3 billion), and about 150 other money-losing companies with a combined valuation of approximately a half trillion dollars (see list here). Just like the mythical unicorns we imagine and read about in fairy tales, Silicon Valley unicorns are at risk of dying off and becoming a myth as well.
Square at the Heart of the Problem
Following young technology start-ups with names like, Box, Dropbox, and Square can become quite confusing, but investors are becoming less confused about their desire for profits and fair valuations. The recent –33% discount in the planned pre-IPO offering price of Square shares to $11 – $13 ($4 billion) from the last private funding valuation of $15.46 ($6 billion) is signaling the deteriorating health of money-losing unicorns.
Adding insult to injury, money-losing Square provided recent private investors with a controversial “ratchet” clause, which essentially gives privileged investors additional shares, if the IPO (Initial Public Offering) price does not occur at a minimum set price. The net result is a fraction of advantaged investors receive a disproportionate percentage of the company’s value, while a majority of the other investors see their ownership value diluted. According to Forbes, approximately 30% of unicorns carry some contentious ratchet provisions, which may make IPO exits for these companies that much more difficult.
The recent Square news comes on the heels of other unicorns like Dropbox seeing its pre-IPO value being reduced by -24% from industry giant BlackRock Inc (BLK), an early Dropbox investor. According to the Wall Street Journal¸ bankers close to the company admitted achieving a pre-IPO valuation of $10 billion will be challenging. Subsequently, mutual fund behemoth Fidelity wrote down the value of social media, photo disappearing, mobile application company, Snapchat, by -25%.
Unfortunately, the problems for unicorn companies don’t stop after the IPO. Take for example, Fitbit Inc (FIT), the newly minted $6 billion IPO, which took place in June. Even though the wearable technology company may no longer be a unicorn, the -31% decline in its share price during the first half of November is evidence there are consequences to insiders dumping additional over-priced (or high-priced) shares on investors. Of the planned 17 million secondary share sale, the vast majority of the proceeds (14 million shares) are going to insiders who are taking the money and running, thereby leaving the company itself with a much smaller portion of the offering dollars.
Veteran investors have seen this movie before during the late 1990s tech bubble, and investors know that this type of movie ends very badly. As in any bubble, if you are able to participate early enough during the inflation process, it can be a spectacular ride before the bubble bursts. Unicorn companies can sell a dream for a while, but profitless prosperity cannot last forever. Eventually, profits and cash flows do become important for investors. And for some unicorn companies, the day of reckoning appears to have arrived now. It has been a fun, fairy tale ride for unicorn investors up until now, but with a half trillion dollars in unicorn investments beginning to die off, these early stage companies will need a steadier diet of profits to stay alive.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in Uber, Airbnb, SnapChat, Box, Dropbox, Square, BLK, FIT and any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Curing Our Ills with Innovation
Fareed Zakaria thoughts have blanketed both traditional and internet media outlets, spanning everything from Newsweek to Time, and the New York Times to CNN. With an undergraduate diploma from Yale and his PhD from Harvard, Dr. Zakaria has built up quite a following, especially when it comes to foreign affairs.
In his latest Time magazine article, Can America Keep Pace?, Zakaria addresses the role of innovation in the U.S., “Innovation is as American as apple pie.” The innovation lead the U.S. maintains over the rest of the world will not evaporate over night because this cultural instinct is bred into our DNA – innovation is not something you one can learn directly from a textbook, Wikipedia, or Google (GOOG). With that said, the innovation gap is narrowing between developed and developing countries. New York Times columnist Tom Friedman captured this sentiment when he stated the following:
“French voters are trying to preserve a 35-hour work week in a world where Indian engineers are ready to work a 35-hour day.”
The fungibility of labor has pressured industries by transferring jobs abroad to much lower-cost regions like China and India, and that trend is only expanding further into countries with even lower labor cost advantages. Zakaria agrees:
“America’s future growth will have to come from new industries that create new products and processes. Older industries are under tremendous pressure.”
The good news is the United States maintains a significant lead in certain industries. For instance, we Yankees have a tremendous lead in fields such as biotechnology, entertainment, internet technologies, and consumer electronics.
The poster child for innovation is Apple Inc. (AAPL), which arose from the ashes of death ten years ago with its then ground-breaking new product, the iPod. Since then, Apple has introduced many innovative products and upgrades as a result of its research and development efforts, including the recently launched iPad.
The Education Engine
Where we are falling short is in education, which is the foundation to innovation. In a country with a high school system that Microsoft Corp.’s (MSFT) founder Bill Gates calls “obsolete,” society is left with one-third of the students not graduating and nearly half of the remaining graduates unprepared for college. In this instant gratification society we live in, the long-term critical education issue has been pushed to the backburner. Other emerging countries like China and India are churning out more college graduates by the millions, and also dominating us in the key strategic count of engineering degrees.
Government’s Role
With the massive debt and deficits our country currently faces, an ongoing debate about the size and role of government persists. Zakaria makes the case that government must place a significant role when it comes to innovation. Unfortunately, the U.S. wastes billions on pork-barrel projects and suboptimal subsidies while dilly-dallying in political gridlock over critical investments in education, infrastructure spending, basic research, and energy policies. In the meantime, our fellow competing countries are catching up to us, and in certain cases passing us (e.g., alternative energy investments – see Electric Profits).
Zakaria makes this point on the subject:
“The fastest-growing economies are all busy using government policy to establish commanding leads in one industry after another. Google’s Eric Schmidt points out that ‘the fact of the matter is, other countries are putting a lot more money into nurturing new industries than we are, and we are not going to win unless we do something like what they’re doing.’”
As a matter of fact, an ITIF (Information Technology & Innovation Foundation) study measuring innovation improvement from 1999 to 2009, as it related to government funding for basic research, education and corporate-tax policies, ranked the U.S. dead last out of 40 countries.
Not All is Lost – Pie Slice Maintained
Although the outlook may sounds bleak, not all is lost. In a recent Wall Street Journal interview with Bob Doll Chief Equity Strategist at the world’s largest money management company (BlackRock has $3.6 trillion in assets under management), he makes the case that the U.S. remains the leading source of technological innovation and home to the greatest universities and the most creative businesses in the world. He sees this trend persisting in part because of our country’s relative demographic advantages:
“Over the next 20 years, the U.S. work force is going to grow by 11%, Europe’s going to fall by five, and Japan’s going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth.”
So while emerging markets, like those in Asia, continue to gain a larger slice of the global GDP pie, Mark Perry at Carpe Diem shows how the U.S has maintained its proportional slice of a growing global economic pie, over the last four decades.
Growth is driven by innovation, and innovation is driven by education. If America wants to maintain its greatness, the focus needs to be placed on innovation-led growth. The world is moving at warp speed, and our neighbors are moving swiftly, whether we come along for the ride or not. The current, sour conversations regarding deficits, debt ceilings, entitlements, wars, and unemployment are all essential discussions, but more importantly, if these debates can be refocused on accelerating innovation, the country will be well on its way to curing its ills.
See also Our Nation’s Keys to Success
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and AAPL, but at the time of publishing SCM had no direct position in MSFT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.