Prosperity Without Progress
Today was Lyft’s ($LYFT) day in the spotlight.
A good “road show” in which the company asked banks and other institutions to promise to buy a lot of shares made its market cap valuation soar to over $25 billion.
And then there are the everyday investors who bought shares at the opening bell price of $87 only to see the stock’s day end at $78.
Lyft will have a lot to prove for the rest of 2019 as Uber’s ($UBER) IPO is around the corner, i.e., “5 minutes away”:
“The pop Lyft’s equity will register on the first day is understandable, as IPOs in the new economy are luxury items with the key attribute people grossly overpay for: the illusion of scarcity. There are half as many publicly traded firms as there were 20 years ago, and most new economy firms have found the private markets are like Coke Zero… they have all of the taste (liquidity, rich valuations) without any of the calories (disclosures, reporting, SEC filings, transparency, analysts using rational valuation models, etc.). Unregulated monopolies kill/acquire promising young firms in the crib, resulting in scant IPOs.
Lyft’s prospectus sounds like a CFO grabbed the mic at an AOC fundraiser — littered with terms like ‘social impact’ and ‘carbon offsets.’ This is a bit of an illusionist’s trick, as Lyft’s admirable focus on the environment wallpapers over the real emissions ride-hailing: a transfer of wealth from drivers to riders. The ‘gig economy’ is Latin for erosion in minimum wage protection or the notion that firms should provide benefits to workers. The payoff, according to these firms and the drivers, is worker flexibility. However, as someone who’s hired hundreds of employees and contractors, the notion that a firm cannot provide flexibility and insurance to employees is simply not true. However, compliance with labor laws sucks, as it’s expensive. Like all of big tech, expensive (non-scaleable) translates to ‘impossible’ for these firms.
The ‘gig’ economy (what a cute word) has been more fuel for a dynamic that’s hollowing out the middle class. Employment has never been stronger — all you need is a smartphone and a car, and you’ve got a job. But wages have been flat for 30 years. Prosperity without progress is a decent description of our economy in the last decade(s). The ninja move kicking the middle class in the nuts is best typified by ride-hailing firms. Uber commands a $120 billion valuation, meaning the firm garners the same value as:
- American Airlines
- Delta
- Ford
- Hertz
- Embraer
- JetBlue
- Matson, and
- Royal Caribbean
… COMBINED.”
Scott Galloway is right, in his newsletter today, to question the current stage of ride-hailing as one big marketing expense.
But there are many other names that this year and early next year will see the light of the public markets:
- Airbnb
- Palantir
- Postmates
- Robinhood
- Stripe
- Slack
- WeWork
- Zoom
Maybe the most practical and least flamboyant name of the list is the video cloud platform, Zoom.
Here is a summary from Crunchbase on Zoom’s prospects:
“Zoom’s fiscal calendar ends on January 31 of each year. That’s a common setup among SaaS companies, giving salespeople a shot at closing their fourth quarter in stronger shape that could be managed with a calendar-year final month.
In its fiscal year ending January 31, 2017, Zoom posted $60.8 million in revenue, breaking effectively even in the process. The company grew more than 100 percent the following year, wrapping January 31, 2018, with $151.5 million in revenue, and a slimmer $3.8 million in net losses.
In its most recent fiscal year concluding January 31, 2019, Zoom more than doubled again to $330.5 million, generating $7.6 million in net income (before non-cash costs wiped the positive result to zero, but that’s a quibble). So Zoom is a fast-growing company that loses very little money. In 2019, that makes it a true unicorn: something rare and valuable. Strip out share-based compensation costs and the company looks even healthier. Turning to margins, in its most recent fiscal year, Zoom posted a gross margin of about 81.5 percent, a stellar figure for a company going public at Zoom’s size. Put another way, that fiscal year’s more than $330 million in revenue generated nearly $270 million in gross profit. The company also generates cash. In its most recent fiscal year, operating activities kicked out over $51 million for the firm. Accounting for its $39.7 million cash burn from investing activities, Zoom is still free-cash-flow positive. Again, at its growth rate, that’s an impressive result. It’s not clear what Zoom will value itself at during the IPO process; its $100 million raise figure listed on its S-1 is more than likely a slim placeholder. But for its investors, the company is getting to the finish line healthy, and at a time in which growth is hot.”
The general rule of thumb is not to invest in IPOs, especially on the first day, despite the temptation.
Typically, one should wait at least two or three quarters so a company can work out any financial kinks.
But Zoom looks immediately intriguing in how it’s matured and evolved its product.
The only other private company giving me a similar impression is Airtable.
But more on that company in a future post:
