Wikipedia calls a Unicorn “A Legendary beast with a large, pointed, spiraling horn projected from its forehead.” Basically a Unicorn is the magical pony of every school girls’ daydream. Recently though Unicorns have taken on a whole new fantasy, those of investors. You cannot read a business journal, newspaper, or tune into business TV or radio without mention of unicorn valuations, startups, and rich 20-something tech entrepreneurs that are on the verge of taking their companies public.
So for investors that are not small school aged girls, unicorns are private companies that have a $1 billion or higher valuation based on fundraising. The term was coined by Aileen Lee of Cowboy Ventures in 2013. Venture Capital (VC) is a very unique business model, one of which invests in many businesses and knows that they will strike-out many times, with the goal of hitting a towering home-run to make up for all the misses (and then some). Some Venture Capitalists are great, and some are not. It is a bit of skill, a bit of luck, but it at the end of the day it is a giant game of unicorn hunting.
Silicon Valley has become breeding ground for technology company startups and has become the big game hunting land of choice for VC hunters. Every VC hunter wants to land the next Apple and that lead to a big boom in the 1990s. VC lead private equity invests in thousands of start-ups and the 1990’s boom went from investments of 0.058% of GDP in 1994 and grew almost 1,900% to peak out at 1.089% of GDP in 2000. The dot.com bust in the early 2000s was equally spectacular as the companies that were taken pubic peaked the Nasdaq at 5,046 in March of 2000 before losing 78% of value and falling to 1,114 by 2002. The dot.com bubble burst sent VC running to hide in the woods, but did not cause tech extinction in the magical forest that is Silicon Valley. The bust caused private equity to review the strategy of taking investments public as soon as possible and since the bust VC has made larger investments, held companies longer, and sponsored more late stage funding which has allowed today’s investments (still mostly technology driven, and many “social media” type investments) to surpass the $1 billion valuation point prior to going public.
So what? You are not an aspiring tech entrepreneur, an investor of private companies, or a speculator in IPOs, so unicorns don’t matter to you, right? Wrong! This is simply not true, unicorns are a big deal, and this is why should you care.
Unicorns spark the imagination of investments and markets. A healthy unicorn market is a healthy market. The late 1990s were boom times for just about all markets, from retail, to automotive, to commodities, to manufacturing, to home building, to tech.
One of Alan Greenspan’s legacies will be his analogy of the FED controlling the market by using the punch to get the party going, and then taking away the punch bowl before the party got out of hand. Though the FED does not, and cannot control IPO and tech valuations, it would seem like IPO and tech valuations have largely set the tone for market parties since World War II. Think about it, the birth of corporate efficiency gains after the war, the birth of the PC market, the birth of the internet, advances in science and medicine, and today’s mobile technology and social media boom have all lead major market rallies, not the FED.
We live in a very dynamic economy where real goods and services, exchanging hands at real locations, fueled by real inputs and people fuel our world. The “real world” that has been the bright spot since the Great Recession, but it is the technology and unicorns that have given investors’ hopes and saved millions of people’s retirement funds. It has not been traditional brick and mortar businesses; it has been Facebook, Apple, Amazon, Netflix, and Google and other technology plays that have rallied the stock market from collapse. For the most part it has not been weak demand that has driven down oil and natural gas prices, it has been supply efficiency gains that were spurred by what?, Technology!
Wal-Mart is the largest retailer in the world, and the 3rd largest employer in the world. Wal-Mart made $3.93 billion last quarter, which is $43,667,000 a day! Wal-Mart makes a “unicorn” worth of profit about every 3 weeks, yet when Wal-Mart hits earnings it is business as usual, and when they miss things get ugly for a few days and may cause their stock to drift down (which it has this year) but it does not set the market tone and cause panic, it should, but it doesn’t. Now look at Amazon. Amazon is publically traded so it is a “former” unicorn, but it is the FUTURE growth that is driving Amazon past the market value of Wal-Mart and captivating the imagination of investors.
Amazon has averaged $16,500,000 in earnings over 2013 and 2014, and only in the last few quarters has it even returned to profitably, or in terms of “unicorns” at profitability of the last two years it would take Amazon 60.61 years to make the same $1 billion unicorn worth of profits that Wal-Mart makes in 3 weeks. Amazon’s 3rd Quarter earnings announcement of $0.17 per $564 share at the time jumped the stock $55 on the announcement. Based on an EPS of $0.17 Amazon was priced at 3,317 times earnings before the news, and on the news they added a staggering additional 323 times earnings!
The argument is not that Amazon and other technology firms may be overvalued, the argument is that as private equity holds companies longer, invests in companies to grow them over the $1 billion unicorn level, there is hope that the current herd of unicorns can fuel, and can continue to fuel the imagination of investors and keep growth alive across many different markets even as other sectors lag.
A soft stock market has shelved many recent public offerings, but the recent IPO of Square has put unicorns back in the spotlight. All eyes will be on Square, as it is not only important to VC firms, and tech entrepreneurs, but important to all markets as unicorns are the brick and mortar future of our economy and will be setting the tone for where our markets go no matter what the FED does.
The above article is an excerpt from EQS Trading’s Weekly Publication on the Commodity Markets called “Signals” which I write and publish every Monday. EQS Trading also publishes a daily “Trade Signals” email that provides in-depth “short” and “long” recommendations and trade strategies for the commodity market with entry prices and stop loss levels.
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