From The Atlantic The Not-Com Bubble Is Popping
I’m generally opposed to people getting fired for political views, but not for gross inaccuracies, incompetence, and poor reasoning, and in that case Derek Thompson of The Atlantic fits the bill. This is the latest howler in a long string of bad articles by said author and is why I normally would pay him no mind, but the reason this article came to my attention is because it went viral, so apparently a lot of people were seduced by his logic or lack thereof.
It is easy to look at today’s crop of sinking IPOs—like Uber, Lyft, and Peloton—or scuttled public offerings, like WeWork, and see an eerie resemblance to the dot-com bubble that popped in 2000.
The article gets off to an inauspicious start. If there is a bubble, it hasn’t burst, and the decline, assuming there is one and accepting the author’s premise, such decline pales in comparison to the 2000-2003 crash. In the latter, tech companies, for all sectors, lost 75-95% of their value in just a few years. Many became worthless. Now compare that to today in which there has been just a single major possible failure: WeWork, a once high-flying start-up which lost 75% of its valuation yet nonetheless is still worth billions. But as disused earlier, it’s decline must be put in the correct context. The rate of tech start-up failure isn’t abnormally high compared to historical trends, and multi-billion dollar companies such as dropbox, uber, airbnb, to name a few, have not fallen that much. AirBnB is still worth $50-60 billion in secondary markets.
Same for Uber. Uber’s IPO debut was $45/share, and the stock is now trading at $32, a decline of 29% and inline with historic market volatility, especially for tech IPOs, which tend to be more volatile than other sectors and stocks. But even blue chip stocks such as 3M and Walmart have had similar large declines in the past even in spite of flat or rising markets. Walmart, from January to December of 2015, even in a backdrop of a bull market in equities, lost 35% of its value, falling from $88 to $58. By comparison, during the the crash of 2000-2003, Microsoft, Cisco, and Oracle fell 70% in just a year, and those those were among the biggest and most well-established tech companies at the time. Smaller tech stocks fell 90-95%, which would like Uber falling to $2-4 if it were like 2001 all over again. Yet Uber is firmly planted at $30-32/share with a valuation of still $50 billion.
Both then and now, the valuations of once-heralded tech enterprises were halved in a matter of weeks.
He links to just a single example: WeWork. He doesn’t cite any other examples of large failures, probably because they don’t exist. His whole thesis hinges on just this single company and otherwise this article would have no reason to exist at all. True, Blue Apron failed, which he mentions, but it was never in the same league as Uber or WeWork.
Both then and now, there was a widespread sense of euphoria curdling into soberness, washed down with the realization that thousands of workers in once-promising firms were poised to lose their jobs.
Even successful, highly profitable companies can have large layoffs, and layoffs are not indicative or predictive of poor company health. In 2008, Google cut 10,000 jobs yet in the subsequent decade Google has done tremulously well and its stock has risen considerably.
And then the article goes from bad to worse…
First, in the dot-com bubble, public investors got hosed. Today, it’s public investors that are doing the hosing.
When the web browser Netscape went public on August 9, 1995—the day many cite as the beginning of the dot-com bubble—its stock skyrocketed from $28 to $75 in a matter of hours, even though the company wasn’t profitable. In today’s market, the opposite is happening: Unicorns with no positive earnings are getting slaughtered at the gates. WeWork’s valuation fell more than 80 percent pre-IPO when investors balked at its mounting losses. Peloton, Lyft, and Uber have also struggled to persuade public markets to grade them on a curve; all saw their stock prices fall on the day of the public offering. Institutions and retail investors are refusing to fork over to unicorns the valuations that private investors were expecting—particularly Softbank, a major backer of Uber, DoorDash, and WeWork.
He literally contradicts himself here and twists words. Pre-IPO investors are called private investors. WeWork never went public, and that 80% decline occurred on the secondary, private market. WeWork falling 80% in a private market contradicts his earlier statement, because it was private investors doing the hosing. He makes a grandiose opening, rhetorical statement “slaughtered at the gates” and then pares it back, writing “struggled to persuade public markets to grade them on a curve,” because the evidence is hardly indicative of a slaughter. As discussed above, Uber only fell 29% from its IPO price, which is not that much and minuscule compared to the 2000-2003 crash, and Uber is still worth $50 billion.
This isn’t a picture of mass mania. It’s a picture of public sobriety, where the masses are diagnosing an acute fever in private markets.
That is because those companies such as Uber and Lyft were already very big and richly-valued when they went public. It’s not like retail investors have enough money to make a company that is already worth $20-100 billion go to $100-500 billion in a single afternoon, compared to in the ’90s when debuts such as Pets.com, TheGlobe.com, and Netscape, were much smaller and went IPO at around $50-100 million instead of $20 billion or more.
Judging from the news, you might think this has been a terrible year for technology companies. But tech IPOs have been strong for the past two years, “as long as what you’re buying is actually a real tech company,” JP Morgan’s chair of market and investment strategy, Michael Cembalest, wrote in an October 7 research note. By “real tech,” Cembalest was referring to companies whose principal product is software, rather than, say, WeWork, which is in truth a real-estate company caught wearing an Actual Tech Company costume before Halloween.
You might not have heard about these “real tech” companies—like Zscaler, Anaplan, and Smartsheet—because they mostly sell business-to-business software or cloud services. But all of them are trading more than 100 percent above their listed IPO price. The problematic firms, Cemablest wrote, are those that aren’t pure tech. Either they sell hardware plus software (like the stationary-bike company Peloton) or they own a digital marketplace for humans to transact goods and services in the physical world, like Uber, Fiverr, and Lyft. All those companies are trading below their IPO price.
Again with the misconstructions and omission of key details, which are recurring themes of this author’s work. First off, Zscaler, Anaplan, and Smartsheet all went public in middle of 2018 whereas Uber, Fiverr, and Lyft only went public in mid-2019. Given that we’re in a bull market the S&P 500 is up 10% since mid-2018, the first three companies had a full extra year or longer to accrue gains. Second, similar to Netscape, Fiverr stock, which went public at $16/share but ended the day at $31, almost doubled in its first day of trading. That counter’s the author’s thesis that retail investors are not interested in bidding up tech companies. Same for Zoom Video Communications, which nearly doubled in its IPO from $36 to $70. Uber and Lyft were fully-valued when they went public, so there wasn’t much room for more upside, and that is a possible reason why the prices have stagnated whereas by comparison Zscaler, Anaplan, and Smartsheet are much smaller. Had Uber went IPO at many years ago at a $10 billion valuation instead of $50 billion, it probably would be $50 billion now. The biggest loser of the lot is lyft, falling 40% from its IPO price, from $72 to $43.
Anyway, this travesty of an article is another example of why we should not pity media layoffs and financial losses. These companies largely brought it upon themselves through biases and shoddy reporting, and readers are wising up to it. Both sides do it…this is just not an attack on The Atlantic, but Fox News and Brietbart are also not immune to blame. The truth should be able to stand on its own merits without the need for over-generalizations and sensationalism.