Why nobody cares about value anymore
What do a US truck electrification business and an Aussie online beauty retailer have in common? Answer: Skyrocketing valuations based on the prospect – or hope – of rapid growth. But if these valuations are hard to justify, why do so many investors not seem to care?
As you know we have been more than stunned by the rapid appreciation of valuations in the venture capital space and irrespective of whether hopes are pinned on electric vehicles or cosmetics, the resultant valuations suggest the outlook is extremely bright.
Hyliion
Most recently we wrote about a Texas-based truck electrification business, called Hyliion. Founded by 28-year-old Thomas Healy, hybrid and electric thrust systems supplier Hyliion merged with cash-box Special Purpose Acquisition Company (SPAC) Tortoise Acquisition Corp. And despite not expecting to generate revenue until 2022 the merger valued Hyliion at US$7 billion.
Momentum is building in the EV space after Nikola (and now Hyliion) initially surged after their mergers. At one point earlier in the year Nikola was valued at more than Ford Motor Corp. A quick look at Tesla, and NIO, Li Auto and XPeng (all Chinese EV start-ups) reveals they are valued at 8.6 times forecast 2021 revenue. For comparison General Motors, Ford, Volkswagen and BMW trade at an average 0.3x sales revenue.
Part of the reason for the extraordinary valuations could be the huge incentives for these special purpose acquisition companies (SPACs), which are also known as “blank cheque companies” to do deals. Based on regulatory filings analysed by Bloomberg, Tortoise Acquisition Corp’s private equity sponsor invested less than US$7 million into the SPAC and will receive about US$450 million in equity value from the acquisition of Hyliion. That US$450 million is about 80 per cent of the $560 million in cash proceeds Hyliion receives by merging with Tortoise.
Adore Beauty
Australia’s experience with SPACs – the cash boxes of the late 80s – still leaves a sour taste so that cannot explain the rapid ascent in the value of Adore Beauty.
Adore Beauty was founded in 1999 by then 21-year-old business student Kate Morris with savings and a A$12,000 loan from her boyfriend’s parents. It’s a classic bootstrapped garage start-up, with a company found in the newspaper employed to design the first website for $8,000.
According to Wikipedia the company first stocked products from Baiame and Santalia, then Bloom in 2002, Clarins in 2006, and Estee Lauder, Bobbi Brown and Clinique in 2014.
BY 2010 the company generated revenue of $2 million; in 2014 it was $7 million. In 2015, Australian retailer Woolworths Limited bought a 25 per cent stake in the company. In 2016 revenue reached $16 million.
Adore Beauty’s revenue took off between 2016 and 2019 hitting $71 million in 2019 and jumping another 65.5 per cent in financial year 2020 to $121.1 million. Calendar 2020 revenues are forecast at $158.2 million.
Thirteen months ago (with the revenue run rate somewhere between $71 million and $121 million) one highly regarded Australian private equity manager paid $60 million for 58 per cent of Adore Beauty, valuing the entire company at $103 million.
Fast forward just over a year and the jump in revenue of less than 100 per cent has translated into a six-fold increase in market valuation. Adore Beauty’s IPO will value the entire company at $635 million based on $6.75 per share.
Investors are happy to pay “top dollar” for “leading online companies” according to one of our peers. Adore will issue new shares to raise $40 million and the Private Equity owners and co-founders will sell down $229.5 million in a partial (large) sale of their stake.
And while founder Kate Morris will no doubt be very grateful that all her hard work and smarts have paid off, she may yet wish she’d been born in the US where a SPAC might have made her a billionaire.
In today’s low interest rate and low growth environment, nobody cares about value. If a company can grow faster than what is currently expected, it will be hotly sought after and the shares will rise. And that’s good enough.
Of course it will all end one day and, while that day could be tomorrow, it could equally be a very long way off. In the meantime, encourage your kids to start their own business.
What do a US truck electrification business and an Aussie online beauty retailer have in common? Answer: Skyrocketing valuations based on the prospect – or hope – of rapid growth. Click To Tweet
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
