Why Do So Many Famous Companies Lose Billions Every Year?
Not making money is the new making money
Not making money is the new making money
Uber reported a $1.1 billion net loss in Q3 2020.
Pinterest burned $208 million in Q4.
Airbnb lost $696 million for the year.
Snapchat lost $944 million in 2020.
Don’t blame the pandemic.
These companies have been losing money for years:
Airbnb lost $135 million in 2015, $136 million in 2016, $70 million in 2017, $16 million in 2018, and $674 million in 2019, with total cumulative losses since 2008 totaling $2.8 billion.
Take a look at Snapchat’s performance:
This company is supposedly “worth” $120 billion.
It’s the same for Blue Apron, Casper, Lime, Dropbox, Lyft, Peloton, Slack, Wayfair, WeWork, Deliveroo, SoundCloud, Ocado, Zillow — pretty much every company you know that was started in the past decade or so — all of them went public for billions despite losing vast amounts of money.
According to one IPO specialist, “In 2018, 81% of U.S. companies were unprofitable in the year leading up to their public offerings.”
The real question is: How the heck do these companies still exist?
Financialization
“We used to build things in this country, now we just stick our hands in another guy’s pocket.” — Frank Zbotka, The Wire
All of these companies are based on somewhat cool ideas and have good-looking brands, but they’re not groundbreaking patentable innovations that won’t eventually face brutal competition, host revolts, and democratic backlash. Plus, their underlying business model is fundamentally unsustainable.
Yesterday’s biggest companies used to own assets and create goods and services. Today’s biggest companies own almost no assets and produce neither goods nor services, but instead act as middlemen who take an irrationally large cut for their minor role in the process.
Uber and Lyft don’t own cars or drive people around.
Facebook/IG/Snap don’t create content for its users to enjoy.
Amazon doesn’t produce most of the products in its store.
Airbnb doesn’t own houses or host travelers.
So how did these companies come to dominate their industries?
One word: Financialization.
Amazon’s Jeff Bezos was the first person to really perfect this insidious art, and these famous “tech” companies are just the latest to capitalize on the lethal gambit. The process is simple:
Find a way to “disrupt” an industry of real producers. (IE book publishers, taxi drivers, content creators, house hosts, etc.)
Create an attractive site/app and charge a fat fee as the broker.
Build a huge amount of media hype to attract colossal amounts of debt and private equity across several rounds of funding.
Rather than paying a dividend to shareholders, use their original investment and their annual profits to strengthen your team and strangle your competition. Make sure the story of your rapid expansion overshadows your mounting losses.
Once you’ve destroyed the competition and have finally started to turn a meager profit, use the money to swallow up-and-coming competitors and coerce democracy to extract advantages that small companies can’t get.
If this sounds like a giant, anti-meritocratic unethical fraud, it’s because it is.
A new paradigm
The most important article I’ve ever written is This Real Estate Bubble Won’t Pop. In it, I explain that a house’s price used to be based on the maximum amount that an area’s average local buyer could afford to mortgage over 25–40 years, but that the new paradigm is that house’s value is now the maximum amount of annual rental income that can be extracted from it by a global investor, multiplied by maximal institutional leverage.
There’s a new paradigm for valuing companies, too.
In previous generations, such a dismal record of profit loss would make companies like Airbnb worthless, with investors avoiding it at all costs. In today’s fairy tale/nightmare of destructive financialization — paired with huge amounts of hype and publicity — Airbnb is seen as a brilliant and important investment, with stock speculators assigning them an initial public market “value” of nearly $90 billion.
The old business valuation paradigm: a company’s stock price was based on saleable tangible assets, plus net profits in the form of dividends, plus projected growth over a reasonable multiple.
The new business valuation paradigm: a company’s stock price is based on pure media hype and the hope of a future global monopoly.
It’s vital to understand that companies aren’t selling products and services anymore… their real product is their stock price.
It’s all about “story-telling”
Seth Godin says that all marketers are liars — and today’s big tech CEOs are the ultimate marketers.
They’re so good at storytelling and myth-making that they’ve managed to convince a generation of young, mostly Robinhood-based gamblers to boost their stock prices to the moon.
The price-to-earnings (P/E) ratio is considered the benchmark number for comparing one company’s stock price to another. The ratio is based on the current stock price divided by the trailing 12-month earnings per share. If a stock price is $10/share, and the P/E ratio is 10, it means that company is earning $1 per share. If you buy a $10 share with a P/E of 20, it’ll roughly take you 20 years to break even.
Warren Buffett likes to buy stocks with a P/E of around 12. The S&P 500’s long-term median P/E ratio is around 15.
Guest what the S&P 500’s current P/E ratio is?
More than double the century-long average. Despite the pandemic and a looming joblessness crisis. (#Bubble)
It’s even worse for the famous financilized fantasy-factory stocks:
Netflix’s P/E is typically 50+.
Amazon’s is pushing 70.
Tesla’s P/E ratio is currently over 300. (That’s $0.50 worth of earnings for every $300 invested. Would you buy a business with an ROI of 0.0015%? Would you acquire a company that will take 600+ years to break even?)
Snap, Pinterest, Uber, and Airbnb don’t even have a P/E ratio because you have to have some actual profits to measure against.
Welcome to the Vampire Economy
I’m sick of “disruptors.” Companies like Uber and Snap and Airbnb and Tesla are little more than story stocks. It took them a good idea and a metric ton of debt and private equity to strangled their competition. It made a few people very rich, and the wider society much poorer.
These aren’t contributing companies — they’re predatory corporations.
As one reader put it:
The thing that gets me is that Uber and Lyft have never made a profit, yet they’ve decimated the taxi industry and have destroyed the livelihoods of many while paying sub-minimum wages to their own drivers. All while using infrastructure they don’t pay for, and changing labor laws (in CA) intended to help the people who work for them by paying millions of $ for calculated propaganda that could have gone to helping the people that work for them! These types of vampiric, exploitative, extraction dependent business models aren’t long-term sustainable in reality and need to be eliminated because they do real damage to the world we all live in without returning any value to anyone but their shareholders. It’s disgusting and evil.
Should society and the market really reward them for that? Or is it time to really question how we define contributing “value” to society?
Do we need to stop letting them write off profits?
Do we need to start aggressively taxing them globally?
Do we need to protect workers from the gig economy?
Do we need to ban financialization?
Do we need to shatter monopolies?
The startups of tomorrow must grow businesses with sound economic foundations, on long-term sustainable models, with deep care for workers, competitors, customers, investors, democracy, and the planet. Instead of being big and famous, they need to be truly great.
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