Fortune USA 201907

0

20

40

60

80

100%

SHARE OF IPOs BY TECH

COMPANIES THAT WERE

PROFITABLE

16%

91%

1980 1990 2000 2010 2018

NOTE: CALCULATED USING LAST 12 MONTHS OR LAST FISCAL YEAR BEFORE IPO.

SOURCE: JAY R. RITTER, UNIVERSITY OF FLORIDA

INVEST

FOCUS

36

FORTUNE.COM // JULY 2019

deficits as a mature player. Facebook showed

just two years of negative FCF (in 2007 and

2008, when it burned $143 million).

At Amazon, long the poster child for tak-

ing losses today to earn profits tomorrow,

the numbers seem almost quaint. The new

venture had negative FCF of $10.6 mil-

lion from 1994 to 1997, but that was just

a fraction of total sales. The only major

underwater span in its history came from

1999 to 2001, when negative FCF totaled

$813 million. But by 2002, Amazon’s FCF

turned positive. All told, the Fab Four had

total negative free cash flow in their early

years of almost exactly $1 billion.

By contrast, the Burners have already

torn through $23.9 billion, encompassing

22 years of FCF deficits and outspend-

ing the Fab Four by around 20 to 1. At

this pace, will they ever reward investors?

Here’s the outlook for each.

TESLA

cash burn (total negative
FCF ): $10.9 billion over
12 years.
outlook: Negative
FCF ballooned to
$4.1 billion in 2017 but
narrowed the following
year to a (comparative-
ly) modest $222 mil-
lion. The reprieve was
short-lived, as Tesla
began to spend heavily
to ramp up production
of its mass-market
Model 3. In the first
quarter of this year,
sales tumbled, and
FCF fell to minus $945
million, forcing Tesla
to raise $2.4 billion in
equity and debt fund-
ing. Morgan Stanley’s
Adam Jonas shocked
the markets by lower-
ing his previous “bear
case” for Tesla’s stock
price from $97 to
$10, citing dangers of
slowing sales in China.
Jonas warned that de-
clining overall demand
is pushing back the

including losses from

earliest years, which

were not specified in

the IPO prospectus).

outlook: In 2016, Lyft

burned $496 million

in FCF, and since then,

the trajectory has

improved only slightly.

The shortfall shrank

a bit to $350 million

in 2018, but in Q1 of

this year, it stood at

$110 million. Lyft is

asset-light, but it’s

still spending so heav-

ily on such basics as

driver pay, insurance,

R&D, and marketing

that operating losses

have continued to

mount. Dan Galves

of Wolfe Research

points out that Lyft

depends on dense

urban markets for

nearly 60% of its busi-

ness, despite those

areas making up only

5% of U.S. households.

And annual growth in

those metro areas, he

reckons, has slowed

to 24%, half the rate

in early 2018. Galves

also cites high driver

costs that “are taking

almost all the revenue”

and doubts that Lyft

will win broad appeal

outside the big cities.

Galves’s price

target: $52

Current price: $58.32

SNAP

cash burn: $2.72 billion

over four years (not

including losses from

earliest years, which

were not in IPO filings).

outlook: Snap is still

burdened by big

research expenses,

equal to one-third

of its total costs,

and R&D needed to

expand its photo-

sharing platform is

expected to jump to

over $900 million this

year. Additionally, it’s

instructive to look at

how much cash Snap

is burning in relation

to all the money it

collects marketing

its service. From the

start of 2017 through

Q1 of this year, Snap

had $2.33 billion in

revenues and churned

through 73% of that

amount, $1.71 bil-

lion in cash. Michael

Pachter of Wedbush

notes that although

user and revenue

growth is impres-

sive, “the road to

profitability appears

to have gotten longer.”

He’s concerned that

big spending on

infrastructure and

R&D has pushed back

the date when Snap

will show positive

Ebitda to at least Q4

of 2020.

Pachter’s price

target: $12.25

Current price:

$13.62

date when Tesla will be

able to fund itself from

operations.

Jonas’s price target

(all targets are for

12 months from

now): $230

Current price: $216

UBER

cash burn: $8.9 billion

over three years (not

including losses from

earliest years).

outlook: In the offer-

ing statement to its

long-awaited IPO in

May, Uber revealed FCF

numbers from 2016

through 2018. In 2016,

Uber posted negative

cash from operations

of $2.9 billion and

spent $1.6 billion in

capex, for a negative

FCF of $4.5 billion.

Since then, the short-

falls have been shrink-

ing, although they have

remained substantial

as the company has

offered price promo-

tions to customers and

spent heavily on the

launch of its Uber Eats

food-delivery service,

raising sales and mar-

keting expenses by

25% in 2018 and 54%

in Q1 of 2019. Tom

White of brokerage D.A.

Davidson tells Fortune,

“Uber has bought itself

some time with good

recent performance

on revenue and book-

ings. But by the end

of this year, investors

will start thinking of

2020 as hopefully the

year where meaning-

ful progress is made

toward profitability.” If

quarters keep slipping

by without concrete

progress, he adds,

investors “will get dis-

couraged or impatient.”

White’s price

target: $46

Current price: $42.33

LYFT

cash burn: $1.36 bil-

lion over three years

and one quarter (not