Any tech savvy investor will have recently seen the valuations surrounding tech firms such as Pinterest and Snapchat. This is interesting from one major perspective, the size of the estimates surrounding each company. The multi-billion dollar valuations over the last few years have sparked concerns by those on both the outside and inside of investment circles, which has led people to the idea that we could be in the middle of another tech bubble. Unicorns, which are ‘firms that possess a value of at least $1 billion,’ appear to be popping up all over Silicon Valley with disruptive technologies. This does not mean that these tech firms do not have some sort of customer value proposition, because they do. The point here is that these valuations may or may not be farfetched.
This whole process began possibly with the purchase of the video-streaming site, YouTube, by Google for approximately $1.65 billion in 2006. At the time the site was not recording a profit, and to this day it is still not doing so. Although the site recorded revenues of around $4 billion in 2014, it did not contribute to Google’s bottom line. Eight years after the acquisition you could argue from both sides that it was a good or poor purchase by Google. On the one hand YouTube’s user base is over one billion, revenue increased by one billion in 2014 from 2013, and of course there is access to Google’s database. However, the site faces large operational expenses, a primarily teenage user base and the threat of other social media sites offering streaming platforms, including Snapchat and Vine.
Of course YouTube is just one example, and if Google purchased it today, you would assume that it would be for a significantly higher price. Facebook purchased the messaging service WhatsApp, which has had some financial difficulties to say the least, for $19 billion in 2014. The service is free for one year, and a subscription of 99 cents per annum is subsequently charged. However, despite the fact that WhatsApp possessed 430 to 550 million active monthly users in the first six months of 2014, it produced a loss of $230 million on revenues of $15 million. Its estimated number of users for January 2015 was approximately 700 million.
Snapchat and Pinterest have been valued at $15 and $11 billion respectively after their latest rounds of capital raising. However, they are still in their early stages of generating revenue. Both tech firms could possibly introduce some level of advertising onto their platforms in order to gauge the user reaction.
One slight exception would possibly be Uber, but this is mainly due to the fact it profits by keeping approximately 20% of the fare, with the rest going to the drivers who act as independent contractors. The firm is expected to produce revenues of around $2 billion in 2015, but its rise could be halted by legislation in certain states and countries as well as by fellow competitors like SnapCar in France, which leaves one to ponder the $41 billion valuation. Nonetheless, it is clear to see that there is an absence of fear in Silicon Valley in terms of expanding and feeding the unicorns of the tech industry.
The valuations could prove to be problematic if a tech firm does eventually go public, or if it is acquired by a larger tech firm. This is because when these firms go public not only is there greater public pressure to demonstrate profitability, but also if the balance sheet performance does not match the valuations placed upon a firm by venture capitalist companies – this could reflect poorly on a stock. Of course venture capitalist firms defend their astronomical projections by saying that that they are based on market share and growth prospects for the start-up tech firms. Founders may also get caught up in the valuations, and if they do they need to be wary with regard to a future capital raise. If they are valued for less than previously thought then a down round can take place, which would lead other investors to question their valuations.
Taking all this into account, are we simply witnessing a repeat of the Dotcom bubble that occurred in 2001? It can be argued that we have not witnessed sufficient tech bubbles to fully acknowledge whether we are merely repeating the crisis that occurred at the beginning of the century. Of course the valuations over the last few years have raised numerous questions, but a tech bubble would imply that a large number of the firms in the industry, if not all are overvalued. Clearly these are highly disruptive technologies, and we could perhaps be confusing a possible bubble with the convergence of a high number of innovations and trends in a short space of time.
Carillion’s Collapse: It’s The Management, Stupid!
When UK-based construction company Carillion PLC finally hit the buffers after months of pointless government efforts to prop up the public sector contractor, it wasn’t long before the finger of blame again pointed to Public Private Partnership (PPP) projects for the financial mess.
It’s a familiar argument that is promoted reflexively in a lot of the UK press because it fits an anti-corporate narrative. It follows the line that when public authorities invite private sector businesses to design, build and operate a public asset, the result will be huge profits for the contractor, its bankers and its shareholders while the public sector carries the bag for bailing out projects when they fail.
In the case of Carillion, that narrative got a boost from a National Audit Office report this week that stated that there’s still insufficient evidence to show that the UK’s Private Finance Initiative (PFI) program delivers value for money. It also said that the cost of PPP/PFI to taxpayers comes to £200bn, a particularly uninformative claim, considering that the equivalent public sector contracting almost always goes over budget and costs taxpayers untold billions of pounds through inefficiency, non-delivery and cost overruns, yet is rarely reported about in the press.
Boost for Nationalist Agenda
The NAO report will boost the Labour Party’s current position that all such projects should be nationalized, whatever the cost.
The only problem with the way that this has been reported is that PFI is not why Carillion collapsed.
In fact, the main reasons for Carillion’s collapse are that it failed to deliver on a wide range of contracted services, so it wasn’t being paid, even as it took on more projects and more and more debt, estimated to total £900m. The company also continued to boost dividends, despite a widening pension deficit, which now sits at £587m. Finally, Carillion incurred cost overruns and delays in the delivery of many public sector projects, of which only three were PFI.
The idea that PFI was to blame for Carillion’s collapse and that taxpayers are now on the hook for the many public sector projects is going to stick, even though it’s nearly as inaccurate as the claim that the company, its investors and its bank finance providers are profiting from the company’s demise.
The Guardian, for example, singled out three PFI investments, including two troubled hospital construction projects, for their contribution to the collapse of the company. These included the £335m rebuilding of the Royal Liverpool University Hospital and the £350m Midland Metropolitan Hospital, both of which ran into expensive delays.
But the media focus on Carillion’s mishandling of three PFI contracts ignores the larger issue, which is the company’s own inability to manage risks associated with the delivery of any of its services.
There is a legitimate debate around whether PFI and its successor, PF2, deliver value for money to public sector institutions such as The National Health Service (NHS). This is because of the higher financing costs for private sector borrowing and thus the significantly higher cost to NHS trusts of having the private sector operate and maintain these assets once they are built.
Bottom Line Focus
At the end of the day, what matters most is the company’s ability to deliver. We’ve seen this before when another opportunistic PFI company, Jarvis, got in over its head and collapsed.
There have been more than 130 health-related PPP projects in the UK since the PFI scheme was established in 1992. Almost all of the large hospital projects were delivered on time and on budget using PFI during the Labour government from 2001 to 2010. This was followed by a sharp fall in waiting lists for surgery and other essential healthcare services across the country.
The issue in this instance should not be the delivery model, but rather the company that is responsible. In Carillion’s case, there is ample evidence that when it came to running the projects that were at the core of its business, nobody effectively managed the rising costs and declining receivables, even as they inexcusably boosted the dividend in each of the 16 years since the company was founded.
The end result, while enriching a few investors, was a precipitous share price decline since the middle of 2017 that more than erased those gains. The company’s lenders are also reported to have started writing down the £835m of committed bank facilities and £140m in short-term facilities, though their exposure could be much higher.
Business as Usual?
Despite all the handwringing, there is no shortage of public sector contractors who will happily take over the many public sector construction and support service contracts that Carillion’s collapse will require the government to put up for tender.
This will follow an established protocol that is designed to ensure that essential services are not interrupted. The larger, more troubled Carillion projects will take longer to renegotiate but will ultimately find replacement companies to deliver them. Work interruptions are likely to be limited, and people who have been laid off as a result of the collapse will quickly find new work, particularly given the current healthy state of the labour market. The takeaway from all of this is simply that bad businesses, whatever their line of work, go to the wall and better ones replace them.
Whatsapp Launches New Venture Aimed at Businesses
Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.
This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.
Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.
Amex: Troubled Credit Card Company Reports $1.2bn Net Loss
On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.
Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.
For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.
In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90. JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.
“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.
American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.
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