Is Due Diligence Making A Comeback?
CNBC asked a simple question last night, "How did WeWork go from a $47 billion valuation to near bankruptcy in just 6 weeks?" The answer is pretty simple as well. Investors aren't doing due diligence. Due diligence is defined as "research and analysis of a company or organization done in preparation for a business transaction."
The signs that WeWork was grossly overpriced all along were obvious to many intelligent observers for a long time. The valuation kept growing, though. The company's revenues and valuation increased at essentially the same rate since 2016, with both metrics approximately tripling. Investors didn't care as they sold it as a technology company, when in reality WeWork is a landlord who loses a lot of money renting office space.
To be fair, WeWork isn't the only company that has been grossly mispriced in the current environment. It's just the biggest and most notable company to be outed thus far. For example, electric scooter startups Bird and Lime keep getting VC money as they have unproven business models. Bird, which just raised money at a $2.5 billion valuation, is said to have lost $100 million on $15 million in revenues during the first quarter this year. A recent analysis showed Bird may be losing much more than $293 per scooter after factoring in various fees.
For VCs and early investors of these money-losing companies, the goal is always a profitable exit, whether that's an IPO or an acquisition. As long as another investor comes along allowing the one before it to get out with a profit, no one will pay too much attention to due diligence. You could even argue taking some of these companies public isn't much different than a Ponzi scheme. The recent flops of high profile IPOs such as Uber, Lyft, Chewy and SmileDirectClub, have shown the final investor, the public markets, are realizing the valuations don't match the economics.
Of course, some of these companies could end up being worth multiples of what they are now. However, the list of companies where the valuation and the ability to generate profits is inversely related continues to grow. With a record 21,380 freshly minted CFAs, we suspect WeWork won't be the last company to have its valuation succumb to due diligence.
Just in time for the holiday season. As is usually the case, layoffs are ramping up as we approach the end of the year. HP announced yesterday it will cut 7,000 to 9,000 employees, roughly 13% to 16% of its global workforce. Share buybacks were not affected, though. The company announced it's increasing its buyback program and boosting its dividend. Kroger also announced yesterday it will lay off hundreds of employees. The number, location and types of jobs cut was not disclosed, but is affecting employees nationwide.
They'll stick to adding more cameras to the iPhone. Apple's CEO Tim Cook shot down any speculation the company will create its own cryptocurrency. “No. I really think that a currency should stay in the hands of countries. I’m not comfortable with the idea of a private group setting up a competing currency,” he said. Coincidentally, his comments come just a couple days after Facebook's plan to launch its own cryptocurrency appeared to hit a wall.
We've seen this before. According to CORE Real Estate, the median sales price of a Manhattan home has fallen to $999,950, which represents a 17% decline from the same period last year. Recent changes to tax laws, such as capping SALT deductions and replacing the "mansion tax" with a higher rate, could be affecting the market. This is the latest blow to the NYC real estate market which has softened. Last year, home sales in Manhattan fell 14%, the largest drop since 2009.
Maybe they should just sell alcohol. Constellation Brands, the maker of popular beers Corona and Modelo, booked nearly $500 million in losses last quarter due to its investment in marijuana company Canopy Growth. Constellation dropped $4 billion last August for a 38% stake in Canada's largest marijuana producer. As a result of Canopy shares falling about 30% since the deal was announced, Constellation also announced they wrote down the value of their investment by $839 million last quarter.
Is it because of hazardous market conditions? Despite investors bidding up shares of Beyond Meat since its IPO, the fake-meat producer's competitor, Impossible Foods, has no plans to go public anytime soon. Impossible Foods' CEO said "we’ll definitely have to raise more money, I would say we are not looking in the near-term future toward an IPO.” Luckily for them, they have deep-pocketed investors such as Bill Gates and a slew of Hollywood celebrities. However, eventually these investors and employees will want to cash out and an IPO is the perfect opportunity.