It’s all about the Cash Flow
Roger Montgomery has written extensively about the profitless Unicorns – recent start-ups like Slack Technologies, Uber, Lyft, Peloton and WeWork – which are yet to produce predictable or sustainable cash flow. The table below details each of these companies’ share price movements from their recent peak, their current market capitalisation, their recent quarterly revenue on an annualised basis, and finally the ratio of the current market capitalisation to annualised revenue.
The sample of five have, from their peak, seen an average share price decline of 43 per cent to an average market capitalisation of US$20 billion (ranging from $8 billion to $56 billion). Average annualised revenue is US$3.9 billion (ranging from $0.6 billion to $11.5 billion) and the ratio of average market capitalisation to annualised revenue is over 5X.
Going deeper into the analysis requires an educated estimate on when (and if) each company turns cash flow positive, as well as the magnitude and degree of confidence in that position becoming sustainable. For most observers, that is currently guesswork, at best.
|Company||Share Price Move from Peak (%)||Current Market Capitalisation (US$b)||Recent Quarterly Revenue (annualised) US$b)||Current Market Capitalisation/ Revenue (x)|
A quick case study:
After attaining a peak valuation of US$47 billion, WeWork is going “back to basics”, closing or selling those businesses outside of the main office-sharing operations; and laying off between 20 per cent and 40 per cent of their 12,500 employees. The US$9.5b lifeline by the SoftBank Group now values WeWork at around $12 billion, and this may prove generous given the Company lost US$1.4 billion on US$1.5 billion of revenue in the June 2019 half-year.
Founded in 1978 by Alf Moufarrige AO, Servcorp Limited (ASX: SRV), a company which has done much the same as WeWork for the past four decades, has a market capitalisation of A$416 million, cash on hand of $66 million, and sells on an historical price/revenue ratio of 1.23X and a PE of 14X.
WeWork is a start-up with enormous cash losses; Servcorp has used its strong base in Australia and New Zealand to selectively expand into North Asia, Europe and the Middle East and the USA to achieve a global footprint of 5,788 offices on 155 floors and across 54 cities and 24 countries.
At their recent results presentation, Servcorp prophesised the following, “The USA remains a difficult market particularly where other competitors continue to have limited focus on profitability, and this creates a challenging environment but one that we believe will eventually normalise; patience and time are required”.