I’ve been thinking a lot about the spectacular unicorn failures on Wall Street this year. The implosion of WeWork may be the final nail in the coffin, but the Uber and Lyft debacles seem more significant to me.
I have to wonder if anyone at WeWork investor SoftBank lost their jobs over their multibillion-dollar due diligence failure. Be that as it may, WeWork didn’t hold up to more extensive due diligence from multiple sources and the company never made it to IPO. This could be written off as an unfortunately fatal defect in the form of a wacky founder. Harsher critics might question the specific business model WeWork is pursuing—and rightly so.
But my question isn’t what was wrong with WeWork.
I’m wondering what’s wrong with Wall Street for even thinking of backing such a money-losing company in the first place.
Queue the ridesharing unicorns. Uber did make it through extensive due diligence from multiple sources leading up to its IPO. After rising initially, the stock has handed investors a roughly 50% haircut—so far. Likewise for Lyft, except that it fell right out of the gate at IPO. It’d be interesting to know how much money was made by bears who shorted these high-profile stocks after IPO.
Stipulated: I’m not an expert on the ridesharing business model.
However, I’ve seen analyses contending that these companies are basically dumping lower-cost rides on the market in order to grab market share from other forms of public transportation. The way Uber and Lyft keep losing money supports this conclusion.
Maybe these companies will fake it until they make it, eventually delivering handsome gains for shareholders. Maybe.
But drivers are demanding higher pay. Governments are demanding that drivers be treated like employees—if they don’t just ban ridesharing entirely. Costs are rising, even as the need to deliver actual profits to investors will drive real price discovery. This could end very badly for pioneering shareholders.
Mind you, I’m not saying that ridesharing is a bad idea.
Conceptually, gig employment and the entire “sharing economy” are great ideas. They take idle assets—like cars that sit in driveways all day, or empty houses—and put them to productive use. Generating cash flow from existing, underutilized assets could in time become a development as important as the advent of the personal computer itself.
I’ve often thought that the day of reckoning that stupid economic policies of the past should have reaped years ago was put off by the explosion of productivity personal computing unleashed. If there’s anything that could put off the Greater Depression my friend Doug Casey has long predicted, the sharing economy could be it. (My recent interview with Ross Gerber has me thinking hard about this.)
But as Doug also says, pioneers take the most arrows. So even if that’s all true, it doesn’t mean any given company will be the next blockbuster success. Some investors may think that Uber or Lyft will be the next Apple or Amazon (which did lose money for years at first). Truth is, no one really knows.
But again, the important question is what were the folks on Wall Street thinking to come up with those insane IPO valuations?
Some now say that the unicorn is dead. Wall Street bankers and traders have learned their lessons. They won’t back every crazy Silicon Valley idea just because some charismatic founder says it’s disruptive.
Perhaps so, but I won’t be surprised to see renewed, greed-inspired stupidity on Wall Street the next time markets are frothy and there’s a new investment fad. That could happen sooner than almost anyone thinks if the Fed’s easy-money policies result in a major melt-up in mainstream equities.
So where does all this leave us?
For me, the general lesson reinforces something I already knew; Mr. Market is neither rational nor efficient.
Markets may be “weighing” machines over the long term, but their short-term “voting” machine function is subject to fads, fantasies, and failure. That’s a source of opportunity for speculators—long or short—who understand the difference between price and value.
More specifically to our situation today, the rise and fall of these unicorns is yet more evidence of how “toppy” and “frothy” mainstream equity markets are. There’s no chance we would have seen such lofty valuations for businesses losing hundreds of millions of dollars under bearish, or even average, market conditions.
That doesn’t mean that the party on Wall Street can’t or won’t continue for some time. Despite the president’s complaints that the Fed has not taken nominal interest rates negative, US interest rates are negative in real terms. That easy money is the vodka in this party’s fruit punch, and there’s no sign of it running out.
But it does mean the Wall Street partiers are headed for a fall, a blackout, and a horrible hangover. That’s if they don’t find themselves waking up one fine morning, stripped naked, beaten, and left for dead on some lonely roadside.
This leaves folks who see things my way in the seemingly paradoxical position of being conservative speculators. Go figure.
Caveat emptor,
