Valuation Lesson 101 - 25x Doesn't Last for Long

Now you have the analysts starting to say that tech stocks are overvalued and that there will be a downdraught. Watch the pace of this news start to spread. Along with crazy payouts of the founder of WeWork, investors are going to get even more jittery....  Aivars Lode

Key Takeaway from a Jefferies Equity Research Report

History is the best teacher when it comes to stock valuations. We analyzed the historical multiples for two names across time - WDAY and SPLK. Their peak multiples (both about 25x) in Feb. 2014 lasted for a nano second, followed by a painful ride to the trough in Feb. 2016. As such, we would keep an eye on the high flyers in software and expect the downdraft in valuations to continue. We quantify the downside risk across our coverage universe below.

Click to read full report here

Why WeWork founder Adam Neumann is getting $1.7 billion to leave the company he ran into the ground

Whenever something does not smell right, it usually is not right. I suspect the back story here is that Softbank is trying to stop a run on all of its other investments. Softbank's founder lost a heap in the Bitcoin space and now We Work. Which of their investments is next to crash in value?

This isn’t normal, but nothing about WeWork is normal.

WeWork founder and former CEO Adam Neumann drove his coworking company’s valuation to a whopping $47 billion by selling investors on his personality and the idea that he was revolutionizing real estate through tech. He also steered the company — through a series of poor and avoidable decisions — into near oblivion. Now the company’s biggest investor, SoftBank, is paying him $1.7 billion to leave the company and most of his stock behind. 

That means, as Recode’s Pivot podcast co-host Scott Galloway pointed out, Neumann is getting about $850,000 for each of the 2,000 employees WeWork is expected to lay off — it just hasn’t done so yet because it couldn’t afford the severance. 

Screwing up never felt so good.

“I’ve never seen such a massive consulting fee for someone who is walking away,” Evan Epstein, founder of the corporate governance firm Pacifica Global, told Recode, referring to tech startups. “It’s extraordinary that he walks away with billions of dollars in a situation where maybe the company is imploding and it’s losing value at the rate it is.” 

Corporate debt defaults predicted to increase

More talk of recession.  This time bankers are expecting more defaults on debt 
....Aivars Lode

According to a survey, over two-thirds of credit portfolio managers expect corporate defaults to increase globally over the next 12 months, a significant sign of an economic slowdown.

Among surveyed managers, 75% believe defaults will increase in Europe and 74% believe defaults will increase in North America over the next 12 months, according to a third-quarter survey by the International Association of Credit Portfolio Managers.

The Aggregate Credit Default Outlook index for the next 12 months fell to -56.2 in the most recent survey, down from -45.4 in the previous quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

Managers are most pessimistic about North America and Europe, which each had an index of -66.7. In the previous quarter, North America's index was -59.5, while Europe's was -42.4.

"I think there's increasing consensus that things are looking worse," said Som-lok Leung, IACPM's executive director, in an interview. "Not everyone is using the word 'recession' yet, but definitely using the word 'slowdown.' "

WeWork’s Valuation Falls to $8 Billion Under SoftBank Rescue Offer

The news just keeps on getting worse and this will bleed over the other unicorns ....Aivars Lode

WeWork’s board is expected to meet Tuesday to weigh emergency-financing options including a takeover by SoftBank Group Corp. that would slash the co-working company’s valuation to about $8 billion and alleviate a looming cash crunch. 

Ahead of a Monday deadline to submit bids, SoftBank has offered to lend $5 billion to the struggling startup and accelerate a $1.5 billion equity investment that had been scheduled for next year, people familiar with the matter said. SoftBank also would offer to buy more than $1 billion of stock from existing investors and employees, some of the people said. The moves would boost its equity ownership above 50%.

JPMorgan Chase & Co. plans to submit a competing $5 billion debt package backstopped by the bank that would bring together a group of outside investors including Barry Sternlicht’s Starwood Capital Group.

A special committee of WeWork’s board is expected to reach a decision on which bid to accept this week.

Grubhub’s Struggles Could Chill Food Delivery Hype

About 5 years ago I was speaking on the phone to a Russian investor (whilst he was on his yacht in the bay of St Tropez) and he was telling me what amazing investment opportunities these food delivery companies were. When I started asking how many deliveries they did per hour, he told me two (2). I said "short the stock!"  Oh darn... could not short the stock as it was private. In the DOT com era I saw the same thing whilst I was running Descartes Systems Group, a supply chain optimization company. We had mathematics and finance experts that would run numbers on how our software could optimize delivery and guess what?  Back then, same as now, the food delivery businesses were always money losing businesses!     ....Aivars Lode

News flash: Making money suddenly matters in tech. That is bad news for any company competing in a sector filled with rivals desperate to gain scale, such as food delivery, and could leave Grubhub investors with a bitter aftertaste.

Venture capitalists have, in a matter of months, gone from trumpeting growth at all costs to evangelizing a new ethos that includes terms including “discipline,” “unit economics” and, perhaps most important, “profitability.” The dramatic change in tune has come in the midst of an icy reception from public investors to cash-burning companies like Uber, Lyft, WeWork andPeloton, which were all hotly anticipated by public investors just months ago.

Grubhub has shed 53% of its market value over the past year and 26% over the past three months alone. Those losses have come as a direct result of competitors’ growth. Earlier this month, Edison Trends released data showing Grubhub’s commanding market share lead has been cannibalized over the past 18 months by Uber Eats and the new market leader, DoorDash, which led Grubhub by 11 percentage points of market share as of September.

While losing its stranglehold on the market, Grubhub has also become less profitable. Net income fell from $54 million in the fourth quarter of 2017 to a loss of $5 million during the same period of 2018, according to FactSet, marking Grubhub’s first net loss as a public company. And while the company said after its first-quarter report this year that it would be disciplined about spending despite heavy competition, profits haven’t exactly come roaring back. Not only does Grubhub appear to have lost market share over the past few months, but analysts polled by FactSet expect the company to deliver net income of just $2 million in what is a seasonally weak third quarter, down more than 90% year-over-year.

It could get worse. Grubhub and its competitors have lately caught regulators’ attention for the steep cuts they charge restaurant customers in key geographies such as New York City. There, the City Council’s small-business committee is considering a cap on commission fees that could disproportionately weigh on Grubhub’s bottom line given that it is the largest delivery platform in New York City by far. Second Measure data from August shows Grubhub handles 71% of third-party delivery sales in that market.

As the only publicly traded pure play in the industry, Grubhub’s shares are a barometer of the market’s views on the economics of food delivery. Clearly they reflect doubts even as the business has grown overall. They will likely continue to do so until Grubhub and its competitors can master a more palatable recipe for profitability and growth.

By Laura Forman - Wall Street Journal