“Rhinos are just fat unicorns. If we’d give them the time and attention they deserve, as well as a diet: They’d reveal their majestic ways” – Ashley Purdy
“Rhinos are just fat unicorns. If we’d give them the time and attention they deserve, as well as a diet: They’d reveal their majestic ways”
This Saturday night, nearly 200 million people around the world will be tuning in to watch the Eurovision Song Contest. Song contest may be a stretch; entertainment contest or freak show might be a more appropriate title for the show.
This became quite clear after watching a few performances in the semifinals earlier in the week in which you had singers with horns on their heads and a men’s band dressed as military officers that stripped down to their underwear. Come to think of it, underwear apparently is the outfit of choice to be worn by Israeli representative, superstar singer Noa Kirel, who will sing “Unicorn.”
The amount of hype and expectations regarding her appearance is extraordinary. In my 30-plus years living here, I can’t remember anything even remotely close to this. Noa does this, and Noa does that. Noa takes a sip of water, and out goes a social-media push. It is just plain crazy. I sure hope she wins; otherwise, it’s going to be a big letdown.
In lyrics that rival anything written by top songwriters such as Bob Dylan or Billy Joel, Kirel sings: “I’m gonna stand here like a unicorn
Out here on my own
I got the power of a unicorn
Don’t you ever learn?
That I won’t look back, I won’t look down
I’m going up, you better turn around
The power of a unicorn, the power of a unicorn.”
For investors, the hype of a “unicorn” ends in a letdown
I was actually taken by the words, “Don’t you ever learn?” Far too often for investors, the hype over investing in a “unicorn” ends up with a big letdown. Turn back the clock to last year or go back to 2000, after the hi-tech bubbles popped, and do a postmortem on what actually led to the bursting bubbles. One of the conclusions reached is that money poured into companies that were losing money hand over fist.
Investors had forgotten a very important investing principle: Profits are important. Instead of making money, the narrative changed. We were told that what was important was revenue growth and the potential to change the world, and profits will come at some time in the future. Well, what happened? Reason triumphed over “irrational exuberance,” and the tech market got clobbered.
Four years ago, I wrote in this space: “The We Company, the parent company of the very popular shared-workspace company WeWork is planning to do a huge IPO, on the heels of reported losses of $1.9 billion in ’18. Losses continue to mount, but to be fair, revenues are growing rapidly. They are getting tons of press about the IPO, but is it a good investment? Maybe. There are many reasons that it is and many that it’s not. That’s why I said to do your own research and make your decision.
You thought a unicorn is a legendary animal with one horn? Wrong. In the hi-tech lexicon, a unicorn is a privately held start-up company valued at over $1 billion. They get tremendous attention because they are new, cool, trendy companies that are in many ways changing the way business is done. WeWork has changed the office real-estate market.
These innovation companies are to be praised. But for investors, innovation without profits may make for a losing investment. Just like in 2000, when the narrative changes, beware. We Company co-founder and CEO Adam Neumann told Forbes in ’17: “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.
“That may be great for subscribers of New Age philosophy, but for investors looking to make money, remember that a stock investment is like you are owning that business. In order for the business to succeed, it needs to make money. Period. Spirituality is irrelevant.”
We know what a debacle that whole story turned into.
Just how much do profits matter when it comes to making an investment decision? Frank Caruso, chief investment officer of US Growth Equities at AB, wrote: “The long-term tendency of high-sales-growth companies is to underperform those with high profitability, as measured by returns on assets. What’s more, our research shows that companies with the strongest sales growth are also the least profitable.”
It’s important to note that on many occasions, the reasons companies go public is to raise more money. In the case of unicorns that have sustained billions of dollars in losses, it can be like throwing good money at the bad, giving them even more money to squander.
Alex Wilhem wrote a fascinating article on Techcrunch about the public offerings of some of the biggest names, such as Microsoft, Google, etc. In analyzing the Microsoft IPO, he said: “The firm was profitable, had money in the bank and was not under pressure from external investors to go public. Essentially, Microsoft was the complete opposite of what we often see in the current tech cycle: unicorns limping across the finish line, nursing haircuts, thirsty for cash.”
Caruso concluded with an important investment lesson: “In our view, high and rising profitability, backed by solid business models, is the best formula for identifying investments with solid growth and return potential that can stand the test of time.”
Investors need to remember: Ignore the hype; profits really do matter.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing and is a licensed financial professional both in the United States and Israel. He helps people who open investment accounts in the US.