5 Examples of Disruption Being Very Expensive

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Disruption has been a very big theme for quite some time now. Marc Andreessen famously said, “Why Software is Eating the World.” And this was in 2011. Since then, well, you know, the technology sector has been on fire.

With that said, here are five recent examples of disruption being very expensive:

1) We Work – The office sharing space recently ditched its anticipated IPO. The company is another Unicorn (privately held companies that are valued at $1 billion or more). Per Techcrunch.com there were supposedly 452 Unicorns in the first half of 2019. (1)

The company was valued at $48 billion before they pulled the plug on the IPO. Their disclosure document, Form S-1, um, well, left something to be desired. After the IPO was pulled, the value is now $8 billion.

OUCH

Seems investors didn’t like the valuation, selling of shares and self dealing by the founder and CEO and related governance issues. This company’s mission was to, “elevate the world’s consciousness.” The former CEO is out. Don’t worry; he’ll still be able to buy groceries. He was paid $1.7 billion to leave.

2) Uber (UBER) – This highly anticipated IPO for the ride hailing company went public in 2019. Uber went public at $45 in early May giving it a market capitalization of about $80 billion. It is now trading around $32, with a market capitalization of about $55 billion.

For the second quarter of 2019 they lost $5.2 billion on sales of $3.2 billion. The company indicated much of these losses are related to stock-based compensation expenses for employees.

Keep in mind….Uber doesn’t own the vehicles their passengers are driven around it. Their drivers are independent contractors and they own the vehicles. Uber currently has about 3 million drivers. Imagine if these depreciating vehicles were put on the company’s books?

Finally, California recently passed legislation to essentially have the gig economy independent contracts be reclassified as employees. Uber has politely declined this offer and will continue to treat them as independent contractors. Stay tuned.

3) Lyft (LYFT) – Another ride hailing company and Uber’s main competition in the U.S. also went public in 2019. Lyft has stuck to ride hailing as Uber has veered off into Uber Eats and bike sharing services. Lyft came public in its IPO at $72 a share with a valuation of about $24 billion. It is currently selling around $44 a share with a valuation of about $13 billion.

4) Peloton (PTON) – Priced its IPO at $29 a share and is currently trading around $23 a share. They sell bikes starting at $2,000 and up from there. Then there is the monthly access fee for the streaming of the spin classes.

5) Smile Direct Club (SDC) – Stockholders aren’t smiling here. Smile Direct Club offers invisible aligners for teeth correction. The IPO price was $23 in mid September. It’s currently trading around $12.

Is disruption a good thing? Sure, it can be. Austrian economist Joseph Schumpeter coined the term ‘Creative Destruction’ in 1942. This essentially was the demise of historical practices and procedures to lead to new innovation. Will there continue to be disruption? Absolutely! The question is at what cost?

(1) Techcrunch.com May 29, 2019

The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. This is not a recommendation to purchase or sell the stocks of the companies mentioned. Any opinions are those of Thomas F. Scanlon and not necessarily those of Raymond James.

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