In the past, with rates being stuck to the ground like gum, investors were more than happy to fund all kinds of lavish projects that could one day bring back billions. Think flying taxis, speedy delivery services (just google how many raised capital during covid – you’ll be amazed), buy-now-pay-later’s (check out Klarna’s cuckoo 2021 valuation!) and all sorts of other snazzy – and super expensive – stuff. These projects are all loss-making. They drain so much money for so many years till they turn a corner. And even that’s not guaranteed.
When rates were at near-zero levels (that feels like a lifetime ago now) and the Fed was busy hoovering gov bonds, investors felt like they had to take loads more risk to earn a return – and so they did! Companies found they could suddenly borrow for way less than ever before so it was almost a no-brainer to load up on debt and expand to fund extravagant who-knows-what. Big, glam ideas were sold and investors rushed to fund them. It didn’t matter if these plans would come to fruition, erm ever, so long as one or two worked out. Spray and pray – that’s what they say! And for a while there, investors were eager to fund the fun stuff. Until they weren’t.
Tighter times ahead
We’re now turning a corner into money actually having some sort of cost attached to it (psst: interest rates = cost of money). It’s no longer cheap which means the money taps are starting to run dry. With the Fed raising rates by 0.75% this month, bringing them to almost 4%, investors are getting super picky about which kinds of companies they’re giving their precious capital to.
We’re stepping into a totally different world. A world in which funding a biz that can deliver your doughnut (or anything you fancy, really!) in a flying taxi in less than ten in which you pay for it next month, is slowly fading. The era of flashy-but-not-at-all-money-making companies being able to tap into investors’ fat wallets is vanishing. Investors are no longer dishing out money for projects that might (or might not) work one day.
This has also collided most unfortunately with the cost-of-living-crisis. Consumers can’t quite afford to Deliveroo their food (with all those extra pesky fees!) or pay some for some stupidly overpriced candy that’ll Getir to you in ten. Nah. We’re all tightening our belts and these are exactly the kinds of biz that will suffer going forward.
It’s getting pricier and more loss-making by the day
And this new environment is hurting no one more than Zuckerberg whose company, Meta, has literally become the face for speculative projects and nothing says that more than floating around in the metaverse! Zuckerberg got slapped in the face recently when he basically told his shareholders (the guys who give him the money to fund all this) that he’s gonna keep on pouring money into the metaverse. Regardless of the macro scene, which btw, is pretty dire.
Meta melted by 25%. Investors clearly weren’t having it. Why bother developing some virtual reality when you’ve got insta, whatsapp and facebook – the social media juggernauts – work on building those guys. Nothing wrong with a little bit of profit, right?
Investors think now’s not exactly the time to be building out a virtual reality super project when rates are rising at crazy rates and inflation rips through the entire world. Though, companies that have enough cash to splash on R&D will do well by funding/building these kinds of futuristic projects. If they don’t, who will? But maybe Meta’s not the one to be doing it! Who knows.
Though it didn’t take long for Zuck to realise that markets ain’t having it so today he said ‘I was wrong’ and he went on to fire 13% of his workforce which equates to 11,000 people. Markets liked it though and the stock is up a little over 7%! Talk about serial over-hiring. I’ll definitely be writing about the chaos in tech soon so keep your eyes peeled. Though something tells me the FTX melt-up yesterday will keep you more than occupied!!
Companies that can give shareholders actual money now rather than waiting for maybe-monies are where investors wanna be right now. These are companies with strong balance sheets (aka not overly indebted), and ones that are robust enough to pass on increased costs with consumers. They’re favouring dividend stocks – companies that dish out part of their profits (remember those things?!) to shareholders.
In this new and challenging environment of high inflation, high interest rates and low growth investors would much rather see cold hard cash now than throw money at unprofitable ventures.
Private is where the party will be!
A trend that I think is growing legs and will continue to do is that you’ll find these sorts of companies, the kind that gobble tons of money betting for something cool later down the line, will be kept within the private sphere.
Companies that are private can chug along and do their thing without the tough scrutiny of the stock market and shareholders’ glaring eyes. They don’t need to worry about quarterly earnings and all sorts of short-term stuff that can disrupt that long-term thinking which is crucial for innovation. They’ll have the privacy to do that and reach their mission without those pesky prying eyes.
I reckon this will also mean that companies will remain private for a lot longer than perhaps they normally would. Investors aren’t happy funding these sorts of things, not now anyway, so why not ride out the storm in private. We could very well see companies being taken private too. To get outa the shareholder glare and return when things are rosier. Who knows! A
Companies IPO (aka cash out) when it’s good for them; not you. And right now, it ain’t good. No one wants to cash out at the bottom of a market. They wanna do it at the top! Why do you think so many of these guys went public in 2020-21? Money was flying everywhere!
Now, it’s a totally different story.
So buckle up! Who knows what’s coming next.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
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