People loved dot-com companies until they didn’t. Then they loved credit default swaps until they blew up. Now they love cash-burning companies.
There’s a famous quote ahead of the 2008 financial crisis: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” That’s Citigroup Inc. then-chief executive officer, Chuck Prince, discussing cheap, debt-fueled private equity deals less than a year before the economy collapsed.
By 2010, Prince, no longer chief, got hauled in front of a U.S. Congressional commission to explain himself. Life would have been easier if he’d just kept quiet. One interpretation of Prince’s quip is that companies have a strong incentive to play by the rules of the day. If you’re a bank and your competitors are giving out cheap loans, then you’re going to need to dole out cheap loans yourself or lose market share. You could worry about the long-term risks, but you might be out of a job by then.
There’s a certain parallel to the situation Uber Technologies Inc. finds itself in today, ahead of an initial public offering. Uber was born in an era of low interest rates, when capital has been insanely cheap. At times it has cost people money just to hold onto cash. In this environment, investors have been happy for companies to burn through war chests chasing growth. Uber happily obliged, tallying operating losses of more than $10 billion in three years. It’s one of the best companies in the world at burning through people’s money.
Uber isn’t alone. Smaller U.S. rival Lyft Inc. lost almost $1 billion last year but remains above its private-market value. After a quarter of profitability, Tesla Inc. has gone back to its money-losing ways. The electric car company said this week that it generated a $494 million adjusted loss last quarter and that it may seek to raise more capital. The stock is still more valuable than Ford Motor Co., which blew past profit estimates last quarter.
It’s not just auto-related companies that are celebrated despite heavy spending. Netflix Inc.’s negative free cash flow last year amounted to nearly $3 billion, and it’s on track to do the same this year. When Walt Disney Co. said it would cannibalize licensing revenue to boost a low-priced, $7-a-month streaming service, the stock jumped to an all-time high.
Companies are playing to the tune of their peers. That puts more staid companies in an awkward position. “There are firms that are happy to throw money away without even the hope of it being effective. I think that’s silly,” GrubHub Inc. CEO Matt Maloney said by phone Thursday, after the company reported a small quarterly profit to investors.
Of course, if it were so easy to separate money wasters from business visionaries, there wouldn’t need to be a market. Uber and DoorDash Inc. (who Maloney is probably considering when he talks about money wasters) are going for a land grab. For now, GrubHub’s stock is down this year, while Uber is targeting a valuation of as much as $90 billion in its IPO.
But the world changes—sometimes suddenly. The economy can collapse. The rules of the game can change. The market has been rewarding growth stocks over traditional value investments, but someday that will change.
Uber imagines just such a scenario in the risks section of its IPO filing. It might need to use “a substantial portion” of its cash flow to pay off debts at some point. That could, Uber writes, “heighten our vulnerability to downturns in our business, the industry or in the general economy.”