Editor's letter

Maybe don't take a ride with Uber

There's nothing remotely risqué in buying loss-making firms when they list, says Merryn Somerset Webb. But that doesn't make it a good idea.

943-Uber-634

Think before hopping aboard the IPO

Next month sees the flotation of ride-sharing firm Uber. It expects to be valued at around $100bn. It has never made a profit. It has little obvious prospect of ever making a profit. It has lost about $8bn since it launched. Should you buy shares in it?

Sounds like a silly question, I know, but the truth is that it isn't considered remotely risqu to buy into loss-making firms when they list. Snap, which lost $1.3bn last year, floated two years ago on a valuation of $24bn. Lyft, which lost $911m last year, listed in March at a valuation of $25bn. Pinterest was set to list this week with a possible price of around $11bn. After that there will be Slack ($7bn-ish) and possibly Airbnb. All are unprofitable. And that's not even unusual any more.

Slightly more than 80% of the companies that listed in the US last year were making a loss, compared to a mere 43% in 2008 (it's worth remembering that Google and Facebook were both making money when they listed). This all makes some sense: a few of these firms could well win big.

But the bear case is rather too easy to make for comfort. None of these firms have been tested in a proper business cycle; none are guaranteed to make profits; and their valuations account for neither of these things.

We should view these listings as a way for founders and early shareholders to use the last gasps of quantitative easing (QE) and super-low interest rates to cash out at the kind of prices they know they won't see again rather than as an opportunity for the rest of us to get rich quick. That bit has already happened for the founders. Note that the last time 80% of initial public offerings were loss-making in the US was in 2000. And we all know what happened after that.

What should you look at instead? The first thing to say is that you must look at something. As we point out on page 5, we have just received our annual reminder, in the form of the Barclays Equity Gilt Study, that not investing is almost always worse than investing.

Start with our cover story this week. If, like me, you are constantly having to replace your glasses, you will know that someone is making a lot of money in the vision care sector. We might as well all share in that. Then see Max King's take on Law Debenture. Many of you will hold this already. But if you don't, you might note that it is low-cost, trading on a discount to its net asset value (NAV) and nicely exposed to the value inthe UK stockmarket.

Finally, own some gold. We are increasingly being told that deficits don't matter that credible countries with their own currencies have no need to borrow money. Instead they can, and should, print (or type) it at will (this is known as Modern Monetary Theory, or MMT). That sounds good. But here's the problem: nothing destroys credibility faster than uncontrolled money creation. The more you hear MMT being discussed, the more you should think about topping up your gold holdings.

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The great rotation is firmly underway – what does it mean for you?
Stockmarkets

The great rotation is firmly underway – what does it mean for you?

As investors move away from “jam tomorrow” stocks and back into “old economy” stocks that should benefit from the post-pandemic recovery, the tech-hea…
5 Mar 2021
America’s “SPAC” boom is coming to Europe
Stockmarkets

America’s “SPAC” boom is coming to Europe

SPACs are shell firms that list on the stockmarket in order to raise cash, then merge with another company. Once confined to the US tech scene, Europe…
4 Mar 2021
Why the classic 60/40 investment portfolio may no longer work
Investment strategy

Why the classic 60/40 investment portfolio may no longer work

The dramatic events in the bond market have thrown into question the classic investment strategy of the last 40 years. An investment portfolio made up…
1 Mar 2021

Most Popular

A beginner’s guide to bitcoin: where to store your bitcoins
Bitcoin

A beginner’s guide to bitcoin: where to store your bitcoins

Once you've got hold of some bitcoins, you need somewhere secure to keep them. Dominic Frisby outlines some of the best options, from exchanges to col…
4 Mar 2021
A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
The great rotation is firmly underway – what does it mean for you?
Stockmarkets

The great rotation is firmly underway – what does it mean for you?

As investors move away from “jam tomorrow” stocks and back into “old economy” stocks that should benefit from the post-pandemic recovery, the tech-hea…
5 Mar 2021