It has been a dramatic few months for investors in the so-called tech unicorn stocks. Originally, a unicorn was a privately held tech company that had achieved at least a $1 billion valuation in its latest funding round. Over the past year or so, many of these unicorns are shedding the private part of the equation. They’ve now matured enough to launch their initial public offerings and sell stock to the masses.
And the reception has, on the whole, been chilly, to say the least. Investors have given the unicorn stocks the coldest of shoulders, with high-profile IPOs flopping left and right. The missteps of WeWork and its main backer Softbank have cast a chill over the whole tech stock space.
While the profitable tech companies will bounce back, many loss-making firms will continue to see their share prices fall. With the magic gone, it is time to take these seven unicorn stocks to sell and place them in the dump.
Stocks to Sell: Uber (UBER)
While being outright bearish on Lyft (NASDAQ:LYFT), I’ve been closer to neutral on Uber (NYSE:UBER). My more balanced outlook of UBER stock has not paid off, in fact, Uber is looking like just as big of a fiasco in the making as Lyft has been so far.
I never saw a path to a sustainable business for Lyft, as it is the No. 2 player in the U.S. market and has little else going on to bring in profits while the war with Uber drags on in its home market. On the other hand, Uber’s additional lines of business and international operations were supposed to differentiate it from Lyft.
But that hasn’t happened. The food delivery business is looking worse and worse on an almost weekly basis. Read on for more about that. And given the problems with Softbank and unicorn stocks, it looks like Uber is having to give up on many of its international ambitions. For example, it just abandoned $40 million expansion plans in Colombia as it continues to hunker down and try to slow down its cash burn.
Ultimately, with no great core business yet, UBER stock looks primed for more losses. The public market just isn’t willing to fund endless loss-making operations anymore. Uber’s management wanted to build a global empire. It is having grave trouble doing that, and the consequences for its stock price could be dramatic.
Softbank has plenty of other question marks beyond just Uber and WeWork. Softbank invested hundreds of millions in another real estate technology company, Compass. Executives are now fleeing Compass as well. Softbank’s hotel investment, Oyo, is led by an unseasoned 25-year-old CEO. Oyo is now facing operational shortfalls and collusion allegations in India. Softbank’s investment in “Uber for Pets” site Wag also appears to be a dog; Softbank invested $300 million last year, and now the whole site is reportedly on the auction block at a massive mark-down.
Those investments are still private though; it appears that stock investors will dodge a bullet on those. Let’s not lose track of Softbank’s other big bummer that is already public: Slack (NYSE:WORK). At first blush, Slack seems like a reasonable business concept. People need tools to help improve workplace efficiency; there is certainly room for something more targeted than e-mail.
It’s not clear that a workplace messaging app alone is a strong standalone business platform though. Companies like Microsoft (NASDAQ:MSFT) are quickly veering into Slack’s space with their own offerings that include top-notch communications services as part of a broader package of workplace software. Over the long term, it’s hard to see Slack as a viable independent company, and with valuations plummeting for unicorns and software-as-a-service companies, WORK stock could end up much lower by the time it eventually gets acquired.
As mentioned above, Softbank’s dog-walking-on-demand site Wag appears to be a bust. Leading pet insurance firm Trupanion (NASDAQ:TRUP), is down 40% this summer as its business model comes under increasing scrutiny. Thus, it stands to reason that you might want to sell online pet products site Chewy (NYSE:CHWY), while there’s still some meat on that bone.
Sure, CHWY stock is down by a third since it started trading. So it’s already getting fairly cheap, right? Not so fast. For one thing, Chewy is still selling for nearly 2.5x sales. That’s extremely expensive for a money-losing niche e-commerce play. During its pre-Amazon Web Services days, even Amazon (NASDAQ:AMZN) traded cheaper than this on a sales basis. And rival sites like Overstock (NASDAQ:OSTK) historically traded for less than 1x sales.
Chewy also has negative book value and very little cash; there’s hardly anything here besides revenue growth to get excited about. But again, this is a retail company, not a software one. You can always get more revenues by cutting prices. That doesn’t necessarily lead to a profitable or sustainable business, however. With investors shunning money-losing unicorns, CHWY stock should get thrown to the wolves.
SmileDirectClub (NASDAQ:SDC) is already down from $16 following its IPO to $11 now. But it could get drilled some more in coming months. The company is known for its great marketing and publicity campaigns. The actual business, orthodontics by mail, doesn’t look so bright, though. In fact, short seller Hindenberg Research says the company may be engaged in some crooked behavior.
Hindenberg wrote that: “Financially, the company is another profitless, cash incinerating ‘unicorn’ that we believe has significant added financial headwinds to face as a result of regulatory, legal and customer satisfaction liabilities.” To that point, legal action has been taken against SmileDirectClub in many states, suggesting it is performing unlicensed medical work. Consumers have complained about unacceptable product results.
And even if the company overcomes those hurdles, investors may still be disappointed. The addressable market for cheap clear aligners that can only make modest cosmetic changes is probably not that large and will almost certainly not displace the market for traditional braces or Align’s (NASDAQ:ALGN) more sophisticated Invisalign product anytime soon. Once SmileDirectClub’s successful marketing blitz wears off, SDC stock should trade much lower.
Virgin Galactic (SPCE)
Next up, we have Virgin Galactic (NYSE:SPCE). Space tourism is admittedly a very cool concept for a company. Like SpaceX, however, I’m not sure that SPCE stock should be publicly traded at this point. Elon Musk has referred to Tesla (NASDAQ:TSLA) stockholders as “millions of little tyrants” in the past, showing his frustration with managing a long-term growth company to the needs of analysts and traders focused on quarterly earnings reports.
With SpaceX, Musk is even less enthused about the possibility of having public shareholders. SpaceX’s Chief Operating Officer Gwynne Shotwell said last year that the company would never “go public until we’re flying regularly to Mars.” Virgin Galactic, by contrast, has already decided to go public long before showing meaningful revenue or concrete signs that its business plan will work.
This means that Virgin Galactic has to please investors now, even though the payoff will be many years from now, if ever. And should Virgin Galactic experience a shuttle crash or other safety mishap, expect SPCE stock to plummet to nearly zero in short order. Virgin Galactic came public via a SPAC – a Special Purpose Acquisition Company. This is a method of going public when you have a less reputable company that might struggle to withstand the professional analyst scrutiny of a typical IPO process.
That appears to be the case with SPCE stock. It’s one thing to get folks excited about space tourism now, it’s another to keep SPCE stock up through years of slow progress and operating losses. I expect Virgin Galactic stock to head lower as buzz fades, and there’s the possibility of a sudden plunge lower if any safety issues arise.
Grubhub (NASDAQ:GRUB) stock just finished off a most frightful October, with shares falling 40% on a disastrous earnings report. So why is it on this list of unicorn stocks to sell? Simple: even after losing nearly half its value, GRUB stock is still in deep trouble.
When GRUB stock was flying high, investors assumed they owned a clear industry leader that would achieve rising profit margins and customer usage over time. Instead, venture capital — including Softbank — has flooded the space with cheap money, giving rivals like Uber Eats, DoorDash and Postmates endless funds with which to fight for customers. As a result, according to Grubhub management, customers are getting “promiscuous” and using a variety of delivery services. When customers aren’t loyal to a platform, you have to spend more on marketing and lower prices, which destroys your earnings.
Like with Uber itself, you aren’t going to have a sustainable profitable business here until there is some form of consistent pricing power. Right now, you don’t have that. These companies are offering service at an unsustainable price point, resulting in losses for everyone involved. The only way to win, as far as delivery goes, is to use the service as a customer while avoid or selling short the food delivery app stocks.
Beyond Meat (BYND)
Speaking of food, our last unicorn stock to sell is another formerly trendy food offering that has now started to go stale. Beyond Meat (NASDAQ:BYND) thrilled speculators earlier this year with a jaw-dropping run. BYND stock shot up as much as eight-fold from its original IPO price of $25 per share. People started to dream of Beyond Meat becoming the next big food company.
Reality struck back hard and fast though. To Beyond Meat’s credit, they actually delivered a relatively strong earnings report recently. But it wasn’t nearly enough to justify the ludicrously optimistic assumptions that people had built into Beyond Meat’s stock price. At its peak, Beyond Meat was priced near the same market cap as century-old packaged foods companies with dozens of times more revenues as Beyond Meat.
And those competitors aren’t playing around. Rivals like Kellogg (NYSE:K), Tyson Foods (NYSE:TSN) and Hormel Foods (NYSE:HRL) have been quick to launch their own plant-based alternatives. Fellow plant-based meat unicorn Impossible Foods is also bringing heavy competitive fire. Beyond Meat has a hot product that consumers love. But it has no moat or sustainable advantage. As such, it was never worth the many billions of dollars of value that speculators bid it up to. And BYND stock will keep coming down as insiders start being able to sell stock freely and traders move on to the next promising consumer trend.
At the time of this writing, Ian Bezek owned HRL stock and held no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.