The unicorns bubble

The Economist has a very good article that evaluates the numbers behind the current set of unicorns. It examined the numbers for a dozen of the leading unicorns and found,

The IPO valuations the companies in our panel have received or are apparently looking for add up to $350bn. Based on a discounted cashflow model, in aggregate the dozen firms will need to increase their sales by a compound annual rate of 49% for ten years to justify that valuation. That is the same as the average growth of Amazon, Alphabet and Facebook in the decades after their IPOs. In other words, these firms have to be as likely to outperform the very best of the previous crop as to underperform them. But that is not enough. Justifying the valuation means not just staggering increases in sales, but also a very large improvement in margins. In aggregate these would have to increase by 34 percentage points. That would be truly unprecedented. The average for Amazon, Facebook and Google was only 19 percentage points.

While these unicorns have a valuation of more than a third of a trillion dollars, they have just $6 bn of fixed assets and not too many staff. Further, eleven out of twelve have no profits. In fact operating margins were minus 30%. 

And this on some of the features of the current unicorn bubble,

Today, according to Jay Ritter of the University of Florida, 84% of companies pursuing IPOs have no profits. That is remarkably high. Ten years ago, the proportion was just 33%. To see profitlessness as rampant as today’s you have to go back to the peak of the dotcom boom in 2000. Back then the promise (one soon and spectacularly broken) was that profits would follow once the companies grew. This time round, though, the profit-free companies have already grown. Indeed our panel has burned through $47bn doing so; its companies got through $14bn in 2018 alone. This is profligate even by the standards of Amazon, which before and after its ipowas seen as a particularly profit-averse company; it had cumulative losses of $3bn between 1995 and 2002. Uber lost almost $4bn just last year, excluding exceptional items...

The three ingredients which facilitated the explosion of unicorns,

Smartphones let the companies distribute what they offer at home and abroad, social media let them market it and cloud computing lets them ramp up as demand grows.