Friday, September 23, 2022
And yesterday, I told you to “sell, sell, sell these social media stocks.”
Today’s the final episode of our three-part “BLACKLIST” of tech stocks…
And it’s a doozy.
Here we go…
I’ve long contested that the problem with the ride-hailing sector and the “frictionless” economy is simple: the economics just don’t add up.
For example, look at the ride-hailing industry. The undeniable leader in the sector from the very outset has been Uber Technologies, Inc. (UBER).
But the company has struggled to report a single penny in profit, let alone consistent profits. And even the rosiest analyst projections show the company reporting another loss this year.
It’s true that analysts do expect the company to (finally) turn a small profit of $19 million next year. But come on!
A $19 million profit is peanuts compared to the $30+ billion in losses Uber’s reported since becoming a public company. And hardly enough to justify a rally for shares of a company with a $47 billion market cap.
Here’s the rub: management has long contested that Uber would become consistently profitable at scale, thanks to network effects.
As CEO Dara Khosrowshahi put it, “Market size is irrelevant if it doesn’t translate into profit.” Indeed!
But it operates in 72 countries and over 10,000 cities, with over 115 million active monthly users. If that isn’t scale, what is?
I’ll let journalist Ali Griswold sum it up, “Uber is the definition of scale, yet it is still nowhere near consistent and reliable profitability.” Amen, sister!
Now, I don’t want to sound like I’m picking on Uber exclusively. Uber’s closest U.S. competitor, Lyft, Inc. (LYFT), can’t turn a profit either. In fact, in the last 17 quarters, Lyft’s torched nearly $7 billion in capital.
Add-in other major players (like China’s Didi, Singapore’s Grab, and India’s Ola) and collective losses in the industry are now approaching close to $100 billion since inception.
Of course, the problem isn’t just with the ride-hailing sector. It’s the entire “frictionless” economy.
Growth and scale aren’t translating into consistent profits for food delivery services, either. That shouldn't be a surprise, though, since the restaurant and grocery industries are notoriously low margin. Simply scaling them doesn’t overcome this shortcoming.
Like I said, the economics just don’t work for frictionless businesses for investors, no matter how convenient they are for consumers.
For too many years, this reality has been obscured by investor capital essentially subsidizing massively money-losing businesses. The market sell-off is finally exposing this reality, and it means nothing but more downside ahead for these three companies:
All of us can agree that the pandemic sucked! From a physical and mental health perspective… from a work perspective… from a travel perspective. You name it!
For certain businesses, however, it turned into one of the biggest boom times they’d ever experienced, and probably will ever experience.
I’m talking about companies like DocuSign, Inc. (DOCU), Coinbase Global, Inc. (COIN), Activision Blizzard (ATVI), Chegg (CHGG), Chewy (CHWY), Netflix (NFLX), Peloton Interactive, Inc. (PTON), Robinhood Markets, Inc. (HOOD), Teladoc Health (TDOC), and Zoom Video Communications, Inc. (ZM).
Here’s the key: after more than two years of dealing with lockdowns and work-from-home requirements, American people and companies won’t be deterred from a return to work and (semi) normalcy. And that’s nothing but bad news for these pandemic darlings, especially three in particular that have fundamentally flawed businesses.
The first is Peloton Interactive, Inc. (PTON).
Heck, I’m so convinced that Peloton is doomed, I promised on national television to give away my Peloton bike if the stock rebounded sharply in 2022 like the bullish commentator told viewers to expect.
It hasn’t, and for good reason. Let me explain…
It’s no secret that global lockdowns sent demand for at-home fitness equipment through the roof. If you strolled into any sporting goods store in mid-2020, the entire exercise section of the store was completely barren.
It was a real-world nightmare for all the Arnold Schwarzenegger wannabes.
During this time, demand for Peloton bikes skyrocketed, more than doubling between 2019 and 2020. But it wasn’t sustainable.
For one thing, there’s nothing special about this technology to attract the masses. It’s an overpriced stationary bike with an internet connection.
So as soon as life started to return to normal and gyms reopened, demand was destined to disappear. And that’s precisely what happened:
Pelton’s sales cratered. The company went from a supply shortage to a glut. Management slashed prices and jobs. And it still wasn’t enough to turn around its fortunes.
And it won’t ever be enough, because it’s a faddish product and investment that’s destined to idle and collect dust for ages, or worse, go completely under.
The second pandemic-darling-turned-perpetual-dud is Robinhood Markets, Inc. (HOOD). Turns out, the company that set out to democratize investing is going to end up brutalizing its own investors.
Why? Because Robinhood’s business model is fraught with risk.
From increasing regulatory scrutiny, to low switching costs, to a completely unpredictable client base that trades in and out of fads every quarter.
Not to mention, now that the world is returning to normal, those clients don’t have free money and free time on their hands.
Getting back to the trading activity, it’s the most damning fundamental.
First, customers were piling into stocks. The next quarter, it was cryptos. Then, the company’s quarterly report revealed that its crypto revenue sank 78%. Notice a pattern here?
I’m sorry, but when a business generates the majority of its revenue from new fads, it doesn’t take a genius to figure out what’ll happen if the next new fad doesn’t come along: the company’s sales and income are destined to plummet. And share prices will ultimately follow suit, which is precisely what’s happening now, and promises to continue happening in the quarters ahead.
Last but not least is Coinbase Global, Inc. (COIN), the operator of the world’s largest crypto-currency exchange.
First things first: the company’s entire business model is predicated on an asset (cryptocurrencies) that is arguably the most volatile in the world. That doesn’t make for predictable revenue and profits.
Making matters worse, crypto is perhaps the least understood asset of them all, and yet the majority of Coinbase customers are nubile crypto investors.
When you pair complexity with a lack of understanding and experience, the results can be disastrous. Sure enough, most Coinbase customers that joined the crypto craze late are still nursing losses, or at the very least, are worn out from all the volatility and afraid to keep investing new money in the space.
Add in deficient security measures that lead to countless hacks and increasing regulatory scrutiny, and it doesn’t take a genius to figure out the end game here.
Just like we witnessed with the collapse of foreign currency exchange operators that preyed upon everyday Americans by allowing them to open accounts with credit cards and use massive levels of leverage, Coinbase is preying on unsophisticated investors, too.
That’s not a sustainable business model. Especially when the tide starts going out on the asset propping up the business.
Forget just avoiding the stock — you should avoid having an account with Coinbase at all, as this harrowing tale of a close friend of mine is anything but an isolated case.
Ahead of the tape,