Share Prices & Company Research


13 May 2019

In the land of unicorns

Unicorns... never has a mythical creature been more ubiquitous. Emojis, children’s merchandise and, of course, stock markets, are where these beasts are most frequently found. The poor unicorn has even been dragged into Brexit, with The Guardian publishing Brexit-themed unicorn cartoons following comment from the former UK ambassador to the EU, Sir Ivan Rogers, who described the UK’s Brexit ambitions as a “fantasy island unicorn model”. Whether post-Brexit Britain will turn out to be a fabled land of prosperity remains to be seen, however, let’s discuss the unicorns we know a bit more about.

For those unfamiliar with them, a unicorn in the context of stock markets refers to a ‘start-up’ company thought to be valued at US$1bn or more. A notable unicorn from our own land is Skyscanner, the flight search engine which allows users to find the best deal on plane tickets. However, there are now approximately 344 unicorns with a value of US$1.16tn according to Investors Chronicle, which humorously put forward the notion that these companies are now about as rare as a unicorn-themed lunchbox in a branch of Paperchase, the stationery shop.

When the word was first coined in this context about six years ago far fewer existed. Since then, the method for valuing such start-up companies seems to have floated into the same lands, seeing as many of these so called unicorns are relatively early-stage businesses which are not yet profit-producing. The values demanded are frequently determined by the price paid by venture capital investors at the last ‘funding round’ -  when a portion of the company’s equity is sold to raise money - and some negotiation between existing backers; usually only a few people or groups.

With these practices taking place, it is easy to argue that proper methods of company valuation have gone out of the window for unicorns and are now more of an art. Uber, the taxi ride sharing and food delivery business,  is seeking an initial public offering (IPO) in the US and looking to raise US$9.5 to US$10bn, which would potentially value the company at US$90bn. The firm issued a 431-page prospectus for potential investors to peruse, which was packed with “lawyerly” phrases (according to the Financial Times), and buckets of information on potential risks ahead of the company, but offered little in the way of financial information that might allow analysts looking at the company to understand why a business losing US$3bn annually is worth so much money. For the valuation to make sense, Uber would need to be reporting some large cash flows in the future and the long prospectus doesn’t seem to help with working out whether those earnings are viable.

In an article dated 30th April 2019, the Financial Times drew comparison with the 1986 Microsoft IPO, the prospectus for which contained 52 pages of clear information about how to value the company and four and a half years of financial information showing growing operating margins. The author concluded that this new breed of technology companies want to get huge before they get profitable.
Nicholas Thompson, Investment Executive
In the land of unicorns
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