• Market Crumbs

If It's Too Good To Be True, Enjoy It, Because It Probably Is

Image via Jp Valery on Unsplash

Hailing a ride to the airport using Uber or Lyft. Cruising around town on a scooter from Bird or Lime. Getting food delivered by Doordash or Postmates. Crashing on your Casper after a long day to watch Netflix or listen to Spotify. The benefits offered by these companies, and hundreds more, have become a natural part of so many people's daily lives over the last few years.

The perception of many of these popular companies is likely very different depending on who you ask. For many, these are simply companies that provide great services which have become part of their daily lives. For others, who may read Market Crumbs or follow the news more closely, these are still companies that provide useful services, however, these people realize most are businesses with poor economics that may never be profitable.

Given the disastrous returns of many recent IPOs such as Uber and Lyft, and the collapse of WeWork, some have started to wonder how much longer these companies that have become so engrained in our daily lives will be able to continue to offer their services at such cheap prices. Many of these companies are burning so much cash because they have been willing to take losses to beat their competition, spend so much to acquire customers, or are just outright poor business models.

The investors who fund these companies, whether they're venture capitalists or public market investors, will not do so forever. If they're unable to capitalize on their investment, there comes a point where changes will be made and the users of the company's product or service will also pay a price. For example, take WeWork. As a result of the botched IPO, the company is pulling back its plans to expand in China, India and Latin America. Due to the investors' inability to cash out and the company continuing to burn through their funds, people in these cities will now be unable to rent office space from WeWork.

This same outcome could realistically happen to any of these companies that have become so popular. As so many of them have now gone public and investors in the ones that are still private watch WeWork's valuation crater, it's more likely than not that many investors will be taking a hard look at their company's business model and push for changes.

Of course there are many factors that have created this scenario. One major cause is low interest rates and loose monetary policies, which has led to a misallocation of capital. The sad part is, that it's often the public market investors who are stuck owning these companies once the early investors have made their money. Blue Apron is a good example. The company spends more to acquire customers than they actually earn from them. It's clearly an unsustainable business and has led to the stock falling about 95% since it went public.

In the meantime, many will continue to use these products and services care free, as they should. However, there may come a day when people will look back and reflect on the days when there were so many companies providing products and services for such low prices that you're reminded if it's too good to be true, then it probably is.

Leftover Crumbs

  • Not everyone is on board. A handful of states that were hardest hit by the opioid epidemic are against the proposed $48 billion settlement that would end thousands of lawsuits against five drug companies for their role in the crisis. Representatives from Ohio, New Hampshire and West Virginia don't want the money paid out over time as they need the funds immediately for treatments and are worried the settlement will be paid by population instead of according to the states that were hardest hit. The proposed settlement would divide the money as follows: 15% to each the state treasury and local governments that filed lawsuits and 70% to a state fund to address the crisis.

  • They may need to add some more lawyers for this one. U.S. Senators Ron Wyden and Elizabeth Warren have asked regulators to determine if Amazon properly secured its servers prior to the Capital One hack that exposed the personal information of about 100 million individuals earlier this year. A joint statement said "Amazon continues to sell defective cloud computing services to businesses, government agencies, and to the general public. As such, Amazon shares some responsibility for the theft of data on 100 million Capital One customers." The FBI caught the hacker, who was formerly employed at Amazon, 10 days later after she did a poor job of covering her tracks.

  • Maybe they went a step too far. Google’s Nest devices have been popular with homebuilders the last few years, but their popularity seems to be coming to an abrupt halt. After filling homes with internet-connected thermostats, smoke alarms and locks, homebuilders are scrapping plans to install them as Google now requires a Google account, and subsequently access to its Google Assistant service, to integrate the products with other devices in the homes. Previously, Nest products could be installed with accounts set up directly by users. Mark Zikra, vice president of technology at real estate company CA Ventures, said "We’ve stopped. We don’t have the luxury of being able to say, ‘Hey, are you a Google person or are you a Honeywell person?’"

  • That's probably a good idea. U.S. Senators Charles Schumer and Tom Cotton have asked Joseph Maguire, the acting director of national intelligence, if the popular video sharing app TikTok could pose a "national security risk" to the United States. They fear the Chinese-based company, which recently opened an office in Silicon Valley, could be required by the Chinese government to hand over sensitive user data such as location. The letter from the Senators read "Security experts have voiced concerns that China’s vague patchwork of intelligence, national security, and cybersecurity laws compel Chinese companies to support and cooperate with intelligence work controlled by the Chinese Communist Party."

  • Which companies will be its peers? According to the SEC, Virgin Galactic will list directly on the New York Stock Exchange on Monday. The company, fresh off debuting its line of spacewear, will become the first space tourism company to go public. Virgin Galactic, which will trade under the ticker SPCE, will be valued at $1.5 billion with founder Richard Branson controlling 51% of the company. The company has 603 people on its waiting list for the $250,000 flight.