Homepage / Currency / Companies that burn up $1bn a year are sexy, dangerous, and statistically doomed
Former China internet regulator probed for suspected graft Cramer Remix: For investors scared of this market, it could be time to sell Cramer: Bitcoin and junk bonds are bubbles, but stocks aren't overvalued Marvell CEO on creating an internet of things infrastructure 'pure play' with Cavium acquisition Stocks are 'absolutely' overpriced, but it doesn't matter, says Empire Executions' Peter Costa Cramer: The market's 'era of good feelings' is lifting stocks despite bad news Asia set to open higher after US stocks reach record highs There's a '50/50' chance Meg Whitman will run for president in 2020, says Kevin O'Leary Uber hid a hack that exposed data of 57 million users and drivers for more than a year Trader who tried to bet against tech changes his tune Meg Whitman to leave role as CEO of Hewlett Packard Enterprise, shares tumble 6% Salesforce earnings: 39 cents a share vs expected EPS of 37 cents Electric trucks could sell faster than cars, but Tesla may be aiming at wrong end of the market Disney executive and Pixar co-founder John Lasseter takes leave of absence: Report JPMorgan has a new cybersecurity play, which it says could rally more than 20% JPMorgan reportedly getting into bitcoin futures trading even though Dimon believes it is a fraud Facebook allowed the buying of illegal housing ads months after it said it fixed the problem: Report Alphabet's Eric Schmidt: It can be 'very difficult' for Google to understand truth Forget FANG. These four tech stocks are outperforming this year, adding $600 billion in market cap The advertising-based internet is destroying society, tech pioneer says The case for reforming airport-slot allocation Bank of America sees end of bull market coming in 2018: Here's how it will happen Chinese micro-lenders are plunging on US exchanges after new regulations at home Wall Street analysts say AT&T will ‘prevail’ against DOJ over Time Warner These are the 10 fastest growing jobs in the U.S. US existing home sales rise 2 percent, beat expectations Read this before you buy a new 4K TV this Black Friday Suddenly bullish Goldman sees a big 2018 for stocks due to 'rational exuberance' Shoe retailer DSW stock plunges after company blames hurricanes for earnings miss Boeing shares to rally to new record on 'robust demand' for aircraft: Jefferies PayPal users can now send invoices over Facebook Messenger Amazon has suddenly become a big marketplace for selling genetic tests Apple iPhone X reportedly assembled with illegal student labor Stocks making the biggest moves premarket: LOW, HRL, MDT, DSW, CPB, T & more Dollar Tree profit beats estimates on higher customer traffic A cryptocurrency start-up disappeared with $375,000 from an ICO and nobody can find them Billionaire Mark Cuban says the 'big losers' of the move to block the AT&T-Time Warner merger are Facebook and Google Chip maker Micron, up almost 120% this year, has way more room to run, technician says Buckle up: Tesla could surge to $400 and then get cut in half in 2018, Morgan Stanley predicts This ride-hailing service will pick up your kids where school buses don't go China to fend off bubble risk with tighter property rules Broadcom eyes big changes for Qualcomm's patent practices Political turmoil is good for Angela Merkel, says analyst Iran President Rouhani declares end of Islamic State China's Tencent surpasses Facebook in valuation a day after breaking $500 billion barrier German liberal party member blames socialists for political turmoil, says there was 'zero' compromise Merkel's political future may hinge on one big gamble Tesla’s breakneck expansion speed could be a car crash Finance chiefs say bitcoin is 'real' but many think it's in a bubble right now European markets seen mostly lower on German political uncertainty UK's embattled government set for budget update — here's all you need to know More than $30 million worth of cryptocurrency was just stolen by hackers, company says Trump's latest move on North Korea is confusing experts US Treasury Dept. imposes sanctions on North Korea to curb military programs How personal shopping is giving retailers vital customer data India received a 'surprise' upgrade, but other ratings agencies may not be quick to follow SoftBank funding may spur Uber to re-think tough Southeast Asian market GOP plan will ultimately raise taxes on 50% of Americans, nonpartisan assessment says The FCC has plans to dismantle the rule protecting a neutral internet Cramer Remix: Forget the $450M painting, Intuitive Surgical is the da Vinci of stocks Cramer: The bulls are right about Ollie's Bargain Outlet, but the bears may have a point Airbnb lashes out at Marriott as clash between Silicon Valley and the hotel industry intensifies Cramer gets even more bullish on Netflix and Amazon after comments from Liberty Media's John Malone Cramer's take on Wall Street's top 15 'anointed' stocks for 2017 Asia set to open higher, following US gains overnight Colorado hits Uber with $8.9 million fine over shady drivers Eight women allege Charlie Rose sexually harassed them: Report Market is 'clearly near to a top,' says longtime bull Jeremy Siegel The start-up behind Denver's 200-mph Hyperloop system: 'We love regulation' Tesla has dropped more than 20 percent from September's all-time high The debt time bomb that keeps growing and now equals nearly half of US GDP Square will generate $30 million in annual sales from bitcoin in 2 years, Credit Suisse predicts It's not the economy, stupid. What retail advisors are really worried about this holiday season Vivendi declines to try to take over Ubisoft, for now FanDuel CEO and co-founder Nigel Eccles is leaving to start an eSports company Bitcoin is working well for some big-ticket purchases despite its volatility Ex-Facebook privacy manager says company cares more about data collection than protecting users For its 10th anniversary, Jeff Bezos posted 'before' and 'after' photos of Kindle on Instagram America’s culture wars are spreading to hotels Wall Street is betting against Tinder. Here's why the company's going to succeed Standpoint's Ronnie Moas predicts bitcoin will surge another 70% Apple's new visitor center is now open to the public and dishing out some exclusive swag Salesforce CEO Marc Benioff: 'There's no finish line when it comes to equality' If the US had this H1-B fight in the past, we'd never have gotten Elon Musk, says Roger McNamee The stock market is 'dancing on the rim of a volcano,' warns investment bank eBay leans on AI to help you find the right gift for the holiday season How to find out what Google knows about you and limit the data it collects Merkel says she would prefer new elections to minority government Major AI funding boost in UK aims to fuel driverless car revolution Amazon launches a cloud service for US intelligence agencies Gamers are overreacting to EA's ‘Star Wars’ controversy, publishers should raise prices: Analyst US credit access, financial fragility improve: Fed survey Elon Musk teases flying cars: ‘Rocket tech applied to a car opens up revolutionary possibilities’ Amazon shares to keep rallying as company uses massive spending to deepen its 'moat': Analyst Uber set to buy self-driving cars from Volvo, rivaling Lyft's fleet GM shares upgraded because of automaker's 'advanced' autonomous technology Number of DDoS attack attempts increasing, research shows Victoria's Secret fashion show hits Shanghai without Katy Perry and supermodel Gigi Hadid Jack Bogle’s 5 bold investment predictions for 2018 and beyond EU's preference is ambitious trade deal with UK, Barnier says

Currency

Companies that burn up $1bn a year are sexy, dangerous, and statistically doomed

YVES SAINT LAURENT, Lady Gaga, David Bowie. Some people do not operate by the same rules as everyone else. Might the same be true of companies? Most bosses complain of being slaves to short-term profit targets. Yet a few flout the orthodoxy in flamboyant fashion. Consider Tesla, a maker of electric cars. This year, so far, it has missed its production targets and lost $1.8bn of free cashflow (the money firms generate after capital investment has been subtracted). No matter. If its founder Elon Musk muses aloud about driverless cars and space travel, its shares rise like a rocket—by 66% since the start of January. Tesla is one of a tiny cohort of firms with a licence to lose billions pursuing a dream. The odds of them achieving it are similar to those of aspiring pop stars and couture designers.

Investing today for profits tomorrow is what capitalism is all about. Amazon lost $4bn in 2012-14 while building an empire that now makes money. Nonetheless, it is rare for big companies to sustain heavy losses just to expand fast. If you examine the members of the Russell 1000 index of large American firms, only 25 of them, or 3.3%, lost over $1bn of free cashflow in 2016 (all figures exclude financial firms and are based on Bloomberg data). In 2007 the share was 1.4% and in 1997, under 1%. Most billion-dollar losers today are energy firms temporarily in the doldrums as they adjust to a recent plunge in oil prices. Their losses are an accident.

  • Private jets are getting cheaper

  • Retail sales, producer prices, wages and exchange rates

  • Foreign reserves

  • Annie Baker is a master of loaded silences

  • Argentina’s vegan Mondays

  • China’s leader Xi Jinping declares the start of a “new era”

But a few firms love life in the fast lane. Netflix, Uber and Tesla are tech companies that say their (largely unproven) business models will transform industries. Two others stand out for the sheer persistence of their losses. Chesapeake Energy, a fracking firm at the heart of America’s shale revolution, has lost at least $1bn of free cashflow a year for an incredible 14 years in a row. Nextera Energy, a utility that runs wind and solar plants, and which investors value highly, has managed 12 years on the trot.

Collectively these five firms have burned $100bn in the past decade, yet they boast a total market value of about $300bn. Combining punchy valuations with massive losses means taking the entrepreneurial art form to a dizzying extreme. Steve Jobs, Apple’s co-founder, was said to have a “reality distortion field” that allowed him to bend the perception of others (although Apple itself was fairly timorous, losing just $874 in its worst year, in 1993). The experience of the five suggests that bending reality today has three elements: a vision, fast growth, and financing.

Take the vision thing first. A charismatic leader with a world-changing plan is de rigueur. For its first 23 years Chesapeake was led by Aubrey McClendon, a cocky Oklahoman who pioneered the process of blasting rocks to extract gas and oil (he died last year in a high-speed car crash). Reed Hastings at Netflix plans to destroy the conventional TV industry by selling films and shows over the internet. Like Mr Musk, Travis Kalanick, Uber’s tarnished former boss, dreams of changing how humans travel. Nextera is led by technocrats but their aim is grandiose—to usher in a new generation of energy technology.

The vision needs to be validated by runaway growth. Often firms emphasise a flattering operating measure, such as oil and gas pumped from the ground, the number of rides hailed and so on. Investors need to believe in a high “terminal value”, a point in the future when high, stable profits will arrive. So it helps to show that, hypothetically, profits would gush if breakneck growth were to stop. Uber says it is profitable in cities where it has operated longest, such as San Francisco. Nextera says that if it stopped investing in new capacity, it would make $6bn of free cashflow a year. Netflix amortises the cost of content over periods of up to five years, so reports an accounting profit even as it bleeds cash.

The third element is financing to pay for huge cumulative losses. Each of the five firms has been a financial innovator, taking advantage of cheap money and growth-hungry investors. Uber has tapped private capital markets, Nextera has structured part of its business as a partnership, Tesla has taken deposits from customers and also trades environmental tax credits. Chesapeake Energy sparked Wall Street’s lust for shale junk bonds, and Netflix has signed commitments to make $14bn of future payments to studios and artists to buy creative content.

So sustaining a reality distortion field is possible, but the longer it goes on for, the harder it gets. More capital has to be raised and, in order to justify it, the bigger the firm’s projected ultimate size—its terminal value—has to be. Fast growth puts huge strain on managers. At some point the edifice can come tumbling down. The five companies described here have $60bn of borrowings, and one, Chesapeake, is struggling with its debt load.

Poker face

A few firms other than Amazon have defied the odds. Over the past 20 years Las Vegas Sands, a casino firm, Royal Caribbean, a cruise-line company, and Micron Technology, a chip-maker, each lost $1bn or more for two consecutive years and went on to prosper. But the chances of success are slim. Of the current members of the Russell 1000 index, since 1997 only 37 have lost $1bn or more for at least two years in a row. Of these, 21 still lose money.

To justify their valuations, the five firms examined by Schumpeter must grow their sales by an estimated 8-33% each year for a decade. Based on the record of all American companies since 1950, and the five firms’ present revenue levels, the probability of this happening ranges between 0.1% and 25%, using statistical tables from Credit Suisse, a bank.

Firms that burn piles of cash are often lionised in an era when growth is sluggish and few companies reinvest all their profits. But losing a billion dollars or more a year is a wildly risky affair and the odds are that such businesses will fall flat. This should not be a surprise—hardly anyone can pull off building a fashion empire around androgyny, wearing a raw meat dress to an awards ceremony, or singing about life on Mars.

Source: economist
Companies that burn up bn a year are sexy, dangerous, and statistically doomed

Comments are closed.