Sentiment has never been worse for unicorns. Those same companies like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) were all the rage while private. Yet as soon as they came public, Wall Street decided to hate on them in a big way, and this sentiment may have reached a peak. There is hardly an expert in the media who has anything good to say about them. Consensus is that the era of companies who spend too much money has ended. This of course is totally false.
So today we examine the idea of trading three unicorn stocks into 2020.
The notion that the era of spending is done couldn’t be farther from the truth. Because if that is the case, then we will never have another Amazon (NASDAQ:AMZN) or Facebook (NASDAQ:FB) every again. Aggressive start-ups and growth corporations are supposed to spend a lot in order to grow a lot. The thought of completely killing that notion means that Wall Street decided they’ve had enough of great companies.
So there are opportunities that lie ahead for three headline grabbers in UBER, LYFT and Grubhub (NYSE:GRUB). The experts’ beef with the first two is not a secret. But there is equal hate for food delivery services. GRUB has also fallen out of favor, so it too should have trade setups ahead. It is important to note that the straw that broke the proverbial camel’s back was the botched IPO of WeWork. The negative sentiment from it lingers and the proof of this is the 15% drop in Roku (NASDAQ:ROKU) today and on a strong earnings report.
With that in mind, let’s take a deeper look into these three unicorn stocks to trade.
Unicorn Stocks to Trade Into 2020: Uber (UBER)
This week, UBER is the poster child for what’s wrong with businesses losing money. Almost 100% of the rhetoric is that it cannot continue on this path of losing money. This is in spite of UBER’s strategy, which is to dominate in several verticals.
The company reported earnings and even though the results were decent, all investors could see is the statement that it won’t be profitable until 2021. This was a mistake on the part of the CEO to share such a date, especially when he admitted that there were no set plans for it yet. He clearly was guessing, so why share it? This gave the green light for traders to leave UBER stock for at least a year. Add to this the fear of the lockup expiration and UBER stock had a perfect storm working against it this week.
Nevertheless, this is when brave investors start to go long.
When there are seemingly no fans, then by definition, there should also be very few incremental sellers. I sold a Dec $24 put at the Wednesday open dip for a trade. In a matter of minutes, I closed it for a decent profit.
This is not to boast, but to demonstrate how one person’s fear can be another’s opportunity. My long-term thesis on UBER is simple. I expect it to be a major player in dozens of verticals and dominate in a few. Its cash cow now is the rider business and it has issues. But given that it is the largest player in the arena, it will navigate those challenges as they come up. In the long term, the driver issues won’t matter to the diversified UBER P&L.
Valuation is in the eye of the beholder. I still believe in adding growth companies and UBER only sells at four times its sales. From that perspective, it is just cheaper than Apple (NASDAQ:AAPL) and 50% cheaper than Facebook. Clearly, I am not stating that the company is cheap. My point is that Uber deserves some leeway here and the UBER stock presents an interesting opportunity on this wave of selling.
While the mainstream consensus is that LYFT stock and UBER are in the same boat, I totally disagree. LYFT is a local business with only one vertical, so it shares a segment in common. But UBER is global with many verticals, so it has potential that Lyft will never have.
Nevertheless, LYFT stock has also suffered the same fate as UBER, down 45% from its highs. And it is caught up in the same storm of negative rhetoric punishing it beyond what it fundamentally deserves.
So LYFT stock is also a promising opportunity at these levels. But of the two, I prefer UBER. I like the multi-vertical setup much better than LYFT’s one trick pony. Yes, attacking multiple opportunities may cause confusion, but as they say: “No risk, no reward.”
Thus, it is important to note that owning LYFT stock must be justified by a long term thesis. Otherwise it should be a tactical stock to trade with specific stops below $37 per share and targets above. If the LYFT bulls can close above $46, they can target $52 per share.
I am going to also tie this GRUB stock write up to UBER. What Wall Street hates about UBER most is its UBER eats arm.
On Wednesday morning, CNBC’s Jim Cramer said that the delivery service is not a business … I strongly disagree. Most of us now lead busier lives than ever. And the trend is for us to use more convenience, not less. So the demand for food delivery will continue to grow.
Those who are doing it now like GRUB and UBER are trailblazers. So they will suffer while they set the models that will work. Once they figure it out, they will be rewarded handsomely. The rest will have to play catch-up. I am certain that AMZN found it hard and costly to establish AWS. Now it reaps the benefits.
GRUB stock has lost enough of its froth that it too makes sense to buy into 2020. It has lost half its value this year, so most of the easy risk has been priced out. Heck, it fell 40% just last week, so taking a starter long position with an appropriate stop makes sense.
Moreover, it is now just below its five-year volume point-of-control and those are usually support zones on the way down. Although the earnings gap looks tantalizing, there will be tremendous resistance to break into. So any upside bets on GRUB stock should come with a lot of patience and a tight stop below.
In all three instances, I favor using options to take bullish positions. I prefer selling puts below current levels. This way I don’t even need rallies to profit. By selling a put, I commit to buying the shares, but at a discount from current levels. So in essence, I create a buffer zone, just in case there is bit more pain still ahead.