Echoes of the Dot-Com Boom
Echoes of the dot-com boom... The return of 'creative accounting'... The biggest IPO bust in history?... The 'trade war' could soon get much worse for American consumers... Last call for the Bear Market Survival Event...
Regular Digest readers know the initial public offering ('IPO') market has been booming...
In fact, until ride-hailing giant Uber Technologies' (UBER) disappointing IPO last week – more on that in a moment – the recent frenzy has been unlike anything we've seen since the peak of the dot-com boom. As our colleague Alan Gula noted in the May 7 Digest...
A growing number of stocks are popping 50% or more on their first day of trading. The following table shows the top 10 IPO performances over the past year...
Last month, German e-commerce company Jumia Technologies (JMIA) and remote conferencing services provider Zoom Video Communications (ZM) both went public, surging more than 70% on their first day of trading.
We're in the midst of an IPO frenzy. It's clear that many investors are experiencing the "fear of missing out."
But this isn't the only troubling parallel to the Internet bubble we see today...
Many of these companies are also adopting the same kind of "creative" accounting practices that became all too common back then. As the Wall Street Journal reported yesterday...
Uber Technologies, Lyft, and other big startups going public now have touted their new business models that disrupt old industries but lose historic amounts of money. To try to win over investors, they have also come up with unusual alternatives for measuring their performance...
The ride-hailing rivals have struggled after debuting on the public markets with the two largest-ever 12-month losses for American startups preceding an IPO...
Both companies provide financial measures they say better gauge their performance. These measures ignore significant expenses. Uber calls this "core platform contribution profit," and on this basis, it made $940 million last year versus a $3 billion operating loss. Lyft's "contribution" profit, measured differently, was $921 million.
"The early investors are trying to find some sucker who will buy the stock in the public market," said Howard Schilit, a forensic accountant known for detecting accounting tricks. "In order to sell the deals, they make up a fact pattern that is nonsensical."
For now, however, it appears few investors are falling for these tricks...
Shares of both Uber and Lyft (LYFT) – the two least profitable U.S. companies to IPO in history – have been absolutely punished since they began trading.
Lyft shares have fallen roughly 30% since the company's IPO in March. Meanwhile, Uber's stock has fallen as much as 17% during its first four days of trading.
Worse, even after a sharp rebound over the past two days, Uber shares remain more than 7% below their lower-than-expected IPO price of $45.
At today's prices, almost every shareholder who has invested in the company since 2016 – which includes both IPO investors and private, pre-IPO investors – has lost money. All told, 81% of the company's investors are underwater, according to private market data firm PitchBook.
As news service CNN noted, "No other company has been as well known, raised as much money, shown as much promise, and then performed so poorly out of the gate." Barring a significant turnaround, Uber may go down as the biggest IPO bust in history.
This is obviously bad news for Uber shareholders. But as we mentioned on Friday, it's also an ominous sign for the broad market as well. It could be the first sign that this long boom is faltering.
But once again, this isn't the only reason for caution today...
Regular readers also know we've been following the sudden re-escalation of the "trade war" between the U.S. and China last week. And unfortunately, the outlook has continued to deteriorate since then.
On Monday, we noted that China had responded to President Trump's new tariffs with new tariffs of its own. However, later that same day, we learned that the White House was already preparing to strike back again. From a separate Wall Street Journal report on Monday evening...
The U.S.-China trade dispute escalated sharply Monday, as... Washington laid out nearly $300 billion of new Chinese imports that would face 25% levies as early as this summer.
In a statement Monday, the U.S. trade representative, Robert Lighthizer, said the new tariffs would apply to about $300 billion a year of imports, more than doubling the roughly $250 billion of imports that now face a 25% tariff.
On Monday, Mr. Lighthizer's office began the formal process that could lead to those new tariffs. It set a public hearing for June 17 and a public-comment period that ends June 24, which means the tariffs couldn't be imposed until after that date.
This is a big deal...
You see, the tariffs the U.S. has enacted to date have focused primarily on materials and so-called "intermediate goods." This has raised costs for U.S. producers and importers, but has not yet resulted in significantly higher consumer prices.
This round of tariffs would be different. It would be applied to thousands of everyday consumer products. It would include everything from meat, seafood, fruit, vegetables, and other food items... to smartphones and dozens of other electronics and appliances... to virtually everything made of plastic, rubber, and wood.
American consumers have largely avoided the brunt of the trade war so far. But it appears that may not be the case for much longer... And that would be anything but bullish for stocks or the economy.
In short, the risks to this long bull market are growing...
While we're not getting too defensive just yet, we believe it's time to start preparing for what comes next.
That's why we're holding our first-ever Bear Market Survival Event tonight.
After weeks of planning, it all kicks off less than two hours from now...
Starting at 8 p.m. Eastern time, Porter and legendary investor Jim Rogers will explain why the coming bear market could be the worst on record... show you when it's likely to arrive... and most important, share a complete "roadmap" you can start to follow right now to protect yourself – and even profit – when it does.
Again, this event is absolutely free to attend. And you'll even get the name and ticker symbol of Porter's favorite bear market stock just for showing up. Simply click here to join before 8 p.m. tonight.
New 52-week highs (as of 5/14/19): General Mills (GIS) and Travelers (TRV).
Will you be joining us tonight? We'd love to hear what you think of the event. Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
May 15, 2019