November 6, 2019
If we look at the performance across the stock market since the Fed flipped directions on monetary policy (July 31), value investing is making a big come back. Morningstar’s US Value index has outperformed the US Growth index by five-to-one — in just a thirteen week period.
The tide has turned on the “great disrupters” (FAANG) and Silicon Valley.
With this in mind, I want to revisit one of my Forbes pieces from April where I discussed the prospects for the end of the exuberant tech cycle in Silicon Valley …
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Lyft was valued at close to $25 billion when shares started trading on Friday. Today, it’s down as much as 20% from the Friday highs.
In the buildup to the IPO, the last private investment in the company came in June of last year, and valued Lyft at $15.1 billion. Those investors had a paper gain of over 60% on Friday, for just a 9-month holding period.
For everyone else, remember, you’re looking at a company that did a little over $2 billion in revenue, while losing almost a billion dollars. Most importantly, over the three years of data that Lyft shared in its S-1 filing, revenue growth has been slowing and losses have been widening. So, you’re buying a company that hopes to be profitable in seven years, to justify the valuation today. Keep in mind, this is a company that has only existed for seven years. To think that we can predict what the next seven will look like, in the ever changing technology and political/regulatory environment (much less economic environment), is a stretch. For some perspective on these valuations, below is what it looks like if we compare the three largest/dominant car rental car companies (Enterprise, Hertz and Avis) to the two largest/dominant ride sharing companies (Uber and Lyft).
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With Uber now expected to be valued at around $120 billion when it goes public (possibly this month), the ride sharing industry is valued at about 14 times the car rental industry. The rental car industry has been priced as if the ride-sharing industry has all but killed it. Ironically, if the ride sharing movement is to succeed in the long-run, and is to fully reach the potential that is being priced into the valuations today, then they will need these car rental companies to supply and manage the fleet of vehicles required for Uber and Lyft to scale. If this industry does indeed prove to be the future and ‘high growth’, these car rental companies will be right in the middle of it (indispensable). With the above in mind, this valuation gap clearly shows a disconnect from that reality. It also reflects the regulatory and policy advantage Silicon Valley has enjoyed for the past decade (which is ending). It shows the displacement of capital from Wall Street to Silicon Valley (as a result of those advantages). And it likely shows the exuberance stage of the cycle. I suspect the Lyft (and Uber) IPO might mark the end of the boom cycle for Silicon Valley. Here is the chart on Lyft since it went public … |