There is nothing like technology IPO’s to highlight human optimism and signal the later stages of a bull market cycle.
Examples of the technology “unicorns” (privately held companies valued at more than a Billion USD) include:
- Lyft is a ride share company and Uber rival. It listed in April reaching a high of $88,60 and closing at $59,90 on Friday the 12th of April. Lyft has a market capitalisation of $17,12 billion. Lyft lost $991 million in 2018 on revenue of $2,1 billion.
- Uber is the world’s largest rideshare company and is also planning to list on the New York Stock Exchange in April. The listing is estimated to value the company at about $120 billion. According to Bloomberg “Uber lost $3.04 billion on an operating basis in 2018 on revenue of $11.3 billion, bringing total operating losses over the past three years to more than $10 billion, according to its filing with the U.S. Securities and Exchange Commission.”
- Pinterest, another so-called tech unicorn, raised about $1.4 billion in an IPO valuing it at $12 billion or more.
We have applied the AXIAM Investment Principles to assess whether we would be buyers of these IPO’s.
Principle 4 – Circle of Competence
At AXIAM, our “Circle of Competence” is global companies that own the world’s best brands. We have spent many years analysing global brands and their ability to generate growing cash flows that deliver superior, long-term dividend growth.
Uber entered the BrandZ global brand rankings in 2018 in position 81. Lyft and Pinterest are not in the Top 100.
At AXIAM we focus on investing, which we define as the purchase of productive assets (shares in a company) with the ability to pay income (in the form of dividends) to the owner of that investment.
While investing also grows the owner’s capital (in the form of share price growth), this is a secondary function of investing. Productive assets are bought to own and ideally never to sell.
Uber, Lyft and Pinterest do not generate cash and do not pay dividends. A return will therefore only come from selling later to someone else at a higher price. We do not attempt to make returns from buying and selling.
Principle 10 – Buy when prices are low
Great buying opportunities occur when prices of great businesses decline below the present value of their future cash flows. We never intend to sell.
Uber, Lyft and Pinterest do not generate any cash. We cannot value these companies because we use cash flow as the basis for valuation. IPO’s typically sell late in bull market cycles, so the prices are more likely to be high than low. Insiders attempt to list companies at the most opportune moment for them i.e. at the top of the market, not at the best price for the new investor.
Principle 8 – Investor psychology & emotion drives markets
Emotions of fear and greed cause irrational investors to “buy high and sell low”, the opposite of what they should be doing.
IPO’s are exciting. Lyft’s shares traded 20% above the listing price on the first day of trading. Enthusiastic buyers paid 20% above the listing price for Lyft’s shares, netting sellers a healthy profit on day one. The Pinterest share price rose 33% on the day of listing, meaning the buyers were willing to pay 33% more for the shares. IPO’s indicate a euphoric and optimistic mood.
Our investment philosophy focuses on buying companies that own sought-after brands and generate substantial and growing cash flows. We aim to buy these companies when prices are low and the mood pessimistic and depressed. We avoid speculating in assets that do not generate cash flow to justify their value. We do not succumb to greed and avoid “FOMO” (fear of missing out).
At AXIAM, we have spent many years growing wealth with an investment strategy inspired by the wisdom of great investors like Warren Buffett. We buy shares in companies that pay regular, increasing dividends, because they own great brands that are known, loved and used around the world daily and we keep them for a long time. Sign up for our newsletter, or contact our fund management team to invest.