Why chasing unicorns doesn’t pay

Did you know that the collective noun for a group of unicorns is a ‘blessing’? Symbols of purity, uniqueness and extreme shyness, these chimerical creatures have nevertheless been making an unusual number of public appearances lately. ‘Blessings’ are, in fact, showering down on markets in a form of venture capital IPOs – such entities with values over $1bn were once considered so rare that they became known as unicorns. Now, the most obvious place for unicorns appears to be deep in the forest of the technology sector.

Consider ride sharing company Lyft, for example. Last week, Lyft listed its shares on the Nasdaq at $72 each. The company’s overall valuation immediately soared, with shares rocketing 9% above the market debut level. At one point on opening day, Lyft was valued at $24 billion. But the euphoria didn’t last long. Lyft’s shares descended sharply on their second day of trading and, at the time of writing, were down by more than 10% from their peak.

As bystanders and contrarians, we’re not hugely surprised by this sequence of events. The fact remains that despite being buoyed by rafts of money from venture capitalists, Lyft has yet to turn a profit. In fact, this tech unicorn posted a $911m loss in 2018. So to us, the investment case for Lyft remains in the realm of fairyland.

And while Lyft is the most recent tech unicorn in the spotlight, it’s not an isolated case. Technology companies with similar backgrounds and business models (heavy venture capital investment and the pursuit of growth at any costs) are becoming increasingly common. Clearly, optimistic investors are betting that these young businesses have a lot of room to grow. But here’s the rub: the valuations attached to them, in our opinion, have investors’ high hopes priced in. In contrast, our investors don’t want to be taken for a ride, so we avoid much hyped stocks such as Lyft.

Despite being the national animal of Scotland, we don’t go chasing unicorns – because myths don’t make for sound investments. Instead, we much prefer companies that the wider market considers unloved creatures – because we believe they will have the ability to grow their share price in the long-term.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.