September 30, 2019 BARRON’S 5
A Trip to Cash Burn Alley
WALL STREET HAS COME DOWN WITH A CASE OF HEALTHY
skepticism bordering on common sense. Until it
passes,stockbuyersshouldbewareofcompaniesthat
don’t generate free cash, especially if estimates for
their cash burn are getting worse.
That’sbecausecompaniesthataresupposedtobe
ontheso-calledpathtoprofitabilityhavelatelybeen
stumblingintoselloffcreek.Thelatestis PelotonInteractive (ticker:
PTON),amakerofexercisebikeswhoseThursday initial
publicofferingleftbuyersfeelingtheburn.Sharesskid-
ded 11% by day’s end. It’s not just IPOs, either. Tesla
(TSLA), publicly traded since 2010 but not generating
consistent free cash, is down 27% year to date.
Whataboutlossmakersthathavepaidoffnicelyforin-
vestors,like Amazon.com (AMZN)and Netflix (NFLX)?
Amazonhasactuallybeengeneratingfreecashformore
than15years,andtheamountisexploding.Thisyear,the
company could clear $30 billion, up more than 50% from
lastyear.Amongahandfulofanalystswho’veventuredguessesoutto
2023,theconsensusis$90billion.Ifthat’sevenaroughindication,no
other U.S. company will come close.
Netflixisintheoppositesituation.Itwillburnanestimated$3.4bil-
lionthisyearand$2.5billionnextyear,bringingitsfive-yeartotaltoover
$12billion.Andestimateshavebeenslipping.Ayearago,thecompany
wasexpectedtoswingtopositivefreecashflowby2021.Now,analysts
say 2022. That stock remains a stunning long-term gainer. But it also
peakedatwellover$400insummer2018,andhassinceslumpedto$263.
Financialfundamentalsweren’tsupposedtomatterthismuch.Back
inApril,withinterestratesonceagainfallingandBitcoinperkingup,
Ipredictedaflighttononsense,andbeganbrainstorminginthisspace
for an on-trend company to launch and quickly bring public. Some of
youwerekindenoughtosendsuggestions,rangingfromcannabisven-
tures to, let’s see...mostly it was cannabis stuff, now that I think of it.
I’ve since had more ideas of my own. Leading up to Oktoberfest, I
thoughtaboutanUber-likesharingserviceforlederhosen,calledLuber,
butitturnsoutthatpeoplearealreadybuyingoneanother’sleatherpants
andmoreusingaservicecalledPoshmark.Connectedfitnesssoundscool,
onlyPelotonseemstoointense,soIhadanideaforvirtualmall-walking,
but in mock-ups, the virtual Cinnabon kept making me hungry.
The mood of the market has shifted, however. Uber Technologies
(UBER)tradedrecentlyat$31andchange,downfromaMayIPOprice
of$45.WeWork,whichjustlastweekdelayeditsIPObecauseofafalling
valuation,hasalreadyswappeditslong-hairedCEOfortwoshort-haired
ones,andmadeexpensecontrolapriority.AndthenthewobblyPeloton
start.Shortlybeforethestockbegantrading,thefounderandCEOwas
askedontelevisionaboutwhenthecompanywouldturnprofits.“Ithink
we’reshowing2023,fiscal2023,inthefive-yearplan,”hesaid.Yetsome-
how that granite resolve didn’t appease the math grumps.
We’renotinanIPObubble,basedonthenumberofdealsthisyear,
butweareclosetodot-com-bubblelevelsintermsofthepercentageof
companiescomingpublicthataren’tyetprofitable,accordingtoGoldman
Sachs.InearlySeptember,itpublishedananalysisofmorethan4,
IPOsover25yearsthatsoughttoanswerthequestionofwhichcharac-
teristicspredicthandsomereturns.Blazingsalesgrowthwasimportant,
butsowasreachingprofitabilitywithinthreeyearsofgo-
ingpublic.Amongcompaniesthathadn’tturnedprofitsby
then, few had done so after five years, either.
This“pathtoprofitability”everyonetalksaboutsounds
likeaniceplaceforaleisurelywalk,butmaybeitneeds
a name change. Think of it as Cash Burn Alley—not the
place you want to spend more time than you have to.
Social network Snap (SNAP) stands out as a company
that’s burning cash but whose stock has been soaring
this year. Why? Estimate revisions might be the key. A
year ago, it wasn’t expected to generate free cash until 2022. Now ana-
lysts say 2021, and the burn rate for next year is small enough that
it could yet turn positive. Last week,the companygotanupgradefrom
Guggenheim Securities.
Thereversecan betrue,too.SomereadersthoughtIwastoocritical
of GameStop (GME) when I included it in a roundup of “Radio Shack
stocks”thatarecheapforareason.Itgeneratesfreecash,afterall.But
ithasamixofdeclinesinfreecashandslidingestimatesthatmakesme
thinkitshouldn’tdawdleinplanningforlifebeyondphysicalgamediscs.
OneanalystcalledGameStop’slatestearningsreporta“Chernobylexperi-
ence.” Put me down for less bearish than him, but still bearish.
Estimaterevisionscanofferalimitedreadonbuzzycompanieswith
unfamiliartechnology.There’sasoftwareservicecalled SlackTechnol-
ogies (WORK) that some people at work say is better than email for
collaboration,messaging,andworkflowoptimization.Idon’tlikethat
stuff, so I’m holding out. Usage doesn’t seem to be falling off among
Slack fans, but email is still going strong, too. It’s turning into a real
grudge match.
I’lltakeacloserlookatSlackeventually,butfornow,Inoticethestock
hasfallen40%sinceitsfirsttradeinJune,tolessthanitsIPOreference
price.Maybethiswillturnouttohavebeenabuyingopportunity.ButI
alsoseethatearlyforecastshadthecompanygeneratingfreecashnext
fiscalyear,andnowtheysaytheyearafterthat.I’dwanttoseethattrend
reversebeforegettinginterested.Imightnothaveafullyoptimizedwork-
flow, but I try to keep things flowing away from Cash Burn Alley.
email: [email protected]
Companies that are
supposed to be on the
path to profitability
have been stumbling
into selloff creek.
Streetwise
By Jack Hough