The rise of the Unicorn
The rise of the Unicorn
The phrase ‘History doesn’t repeat itself but it often rhymes’, normally attributed to Mark Twain, is a well-worn portrayal of how investors tend to repeat previous mistakes. This may be in part due to investor’s overconfidence in their ability to identify trends, pick investments and navigate stormy seas in markets. It may also be as a result of the supposition that ‘this time is different’, the fundamental critique of Reinhart & Rogoff’s excellent analysis of financial crises from 1800 – 2010; whereby it is assumed that the ‘new situation bears little similarly to past disasters’.
The rise of the Unicorn, which is a privately held start-up company valued at over $1bn, may be yet another example of investors failing to take note of history.
One method for Unicorns to become public is via an Initial Public Offering (IPO). The number of IPOs in 2019 is likely to be higher than when the record was last set in 1999, prior to the ‘Dot-com crash’ in 2000. The IPOs of 2019 (confirmed and anticipated) include many recognisable names such as Pinterest, Uber, Lyft and AirBnb.
There is another correlation between IPOs of the late 90s and today – the number of loss-making companies going public via an IPO is now higher than during the Dot-com crash.
The expectation of future earnings is key in this scenario. As during the Dot-com crash, the current expectation of future earnings for Unicorns is typically higher than for well established companies, despite in many instances the Unicorn has negative earnings per share (EPS).
History is littered with examples of stock market bubbles which are driven by unrealistic expectations for future earnings. Unfortunately, for each successful Unicorn with roots in the dotcom boom (think Amazon, Google and eBay) there are many that went by the wayside such as Lycos, Pets.com, Pixelon, and Webvan.
