Anyone who knows me, knows I am not one to boast and say, “I told you so” (though I just did). However, as an investment advisor, I like to use cautionary tales to educate my clients and there’s been no bigger cautionary tale this year than the Uber fiasco. In my May 27 blog post – Was Uber’s Tank Empty Before the IPO Trip Started? – I laid out the case that its failed IPO was indicative of why Uber would be a bad investment going forward, stating:
Fundamentally, there are very few reasons to own Uber stock right now. Aside from the fact that it is bleeding red ink by the billions, the company is facing strong headwinds from regulatory, political, competitive and labor challenges that have slowed its trajectory. The only reason it has been able to expand this far was the tens of billions of venture funding, which is now fleeing the company as initial investors cash out. At best, retail investors will be in for a very bumpy ride for the next several years. It will take at least that long for the company to generate the kind of sustained earnings that can support its massive valuation.
That Was Then, This Is Now
The 2019 third-quarter results for Uber did little to change that assessment. Although the company barely beat revenue estimates, Uber is still bleeding red ink by the billions with no indication of when it might finally turn a profit. And, as expected, as soon as Uber’s 180-day restriction on lockup on investor sales came to an end on November 6, early investors and insiders, such as founder and former CEO Travis Kalanick unloaded shares, driving the stock price down further – not exactly a show of confidence in the stock.
Uber’s market valuation is now about $45 billion, down from nearly $70 billion at the end of its first trading day. But with zero profits for the foreseeable future, how does the market justify its valuation?
With unicorns like Uber, it’s very apparent that actual profits (or lack thereof) have little to do with determining their stock’s value. Rather, it has more to with what investors are willing to pay based on how they imagine the companies’ stock price will fare in the future. And, being that it’s impossible to predict what people will pay for them in the future, that’s not the kind of stock serious, long-term investors want in their portfolio.
You Can’t Always Believe the Market
In reality, the market has trouble valuing stocks to the upside as well as the downside. Not in all cases, but enough cases to make us believe that the market does misprice stocks, which, for investors who focus on a company’s actual business performance rather than it’s stock performance creates opportunities.
For example, in my January 18, 2019 blog post – Apples’ Epic Stock Price Decline: Warning or Opportunity? – I made the case that, at its peak stock price of $232 prior to its epic 40% decline at the end of 2018, Apple’s stock was not overvalued and that the market was ignoring its true market potential. I contended that, while the market was beating down the stock for missing expectations on device sales, Apple is actually a superb value play for the growing recurring revenue generated by its services business.
In another “I told you so” blog post on May 20, 2019 (I guess I do that more often than I thought) – Apple’s Epic Stock Decline Proved to be an Opportunity – after Apple’s stock had roared back with a 35% year-to-date gain, I pointed out that Apple’s stock at its October 2018 peak was undervalued and that it was still undervalued at its then $189 price. At its current price of $262 as of November 12, it is now 13% higher than its “overvalued” peak price of last year.
You Can Always Believe the Business Fundamentals
Is Apple now overvalued again? Suddenly the market doesn’t think so, maybe because it has a better understanding of the company’s business fundamentals.
Key to our stock selection criteria is identifying well-managed companies with strong balance sheets but whose stocks are selling at a discount to their intrinsic value. That removes much of the downside risk of the stocks. We also invest in companies with dominant positions in markets with very high ceilings on growth potential. This not only raises the ceiling on their potential price appreciation, but it also raises the floor on potential price decreases. Currently, Uber has no intrinsic value, while Apple is sitting on $245 billion of cash.
