A Growth Cult

Americans have learned a lot about cults this year. From fringe political groups on both sides accusing one another of being in a cult, to several popular documentaries about cults, to witnessing an actual death cult emerge from the anti-mask movement, the word cult¹ has been thrown around a lot. An important thing to remember about cults is that many people don’t realize they’re in one until it’s too late. To them it’s just an enriching social group.

We’re almost to the end of this year, so it’s a good time to review where we started: with record numbers in the stock market², record low unemployment figures³, and boundless enthusiasm about equity growth⁴. Then came some ups and downs with federal stimulus and unemployment checks, Fed purchase programs⁵, and a rash of IPOs along the way, and now here we are: with record numbers in the stock market⁶, record high unemployment figures⁷, and boundless enthusiasm about equity growth⁸. It doesn’t take a math whiz to see an imbalance in that equation.

The stock market is more concerned with the future than the present, but we’re bad at predicting the future. Smart people designed models to project future earnings, but they weren’t built to handle so many chaotic variables⁹ at once, so we’re seeing wildly divergent reports from seemingly reputable sources.¹⁰ We see good news about a vaccine and assume that whenever enough people take it¹¹ then we’ll just crank the engine back up on the greatest economy in the history of the world. Maybe then these valuations will be justified and the naysayers will look like a bunch of clowns.¹²

But if you’re pricing future earnings today, at what point in the future are you anticipating them to materialize? Investors don’t seem to care about the when right now. Instead, they seem to embrace both an endless patience for earnings and record-high enthusiasm about present valuations. There’s no bad news so sobering that they can’t look beyond any dips in the market while they wait for more good news to react favorably towards. This is the kind of mania one could expect from those brainwashed by a cult.

DoorDash IPO

Take Wednesday for example. The world got three new billionaires¹³ when DoorDash launched its IPO and their stock immediately rose 86%¹⁴. They’re a recognizable company who became more visible this past spring when everyone holed up in their homes and ordered meals for delivery, especially after those stimulus checks arrived.¹⁵ DoorDash had never produced a profit until that quarter, yet even under those Goldilocks¹⁶ conditions they could only squeeze out a meager $23 million. More importantly, they then lost $43 million during the following quarter.¹⁷ But investors ignored those numbers in favor of their more than 18 million customers, 1 million “dashers”, and 390,000 participating merchants reported in their prospectus. Sure, those are big numbers, but what do they really mean?

For starters, those 18 million customers really just want food, plain and simple. DoorDash does not produce food. DoorDash exists in a space between hungry customers and food, assessing an added value to the transaction by simply transporting the product between the two parties over a short distance.¹⁸ If the food is good and arrives on time, the customer may remember the restaurant and recommend it to others, but that endorsement would be largely related to the food.¹⁹ If the food is bad or arrives late, the customer remembers the service and may be tempted to seek out a competitor next time.²⁰

As for those one million “dashers,” they’re contract workers who are often subjected to conditions so poor that cities and states have had to intervene to address them,²¹ and though investors may not care a whole lot about that, the workers themselves surely do. This year, desperate times called for desperate measures and many people were forced to turn to the gig economy, but it might be hard to retain a million “dashers” whenever restaurants, bars, and retail reopens to full capacity and more stable employment opportunities are available.

And those 390,000 merchants? In the spring, restaurants were faced with the option of shutting down or trying to implement their own takeout/delivery infrastructure on the fly, so many turned to these delivery services as a lifeline.²² With an opportunity for profitability in sight, DoorDash extorted these restaurants to squeeze as much they were allowed. They’ve since backed off some of their most predatory practices²³, but the experience also inspired a crop of start-ups to enter the DIY software market to help restaurants be more self-reliant on takeout and delivery.²⁴ Eventually these restaurants may find their footing and cut third-party food delivery services off entirely, which would then make them competitors. The last thing DoorDash needs right now is more competition.²⁵

Airbnb IPO

Then on Thursday we minted some more billionaires²⁶ when Airbnb joined the game and investors showed a voracious appetite for a company that reported a loss of more than $696 million through the first nine months of the year and had laid off more than 2,000 employees.²⁷ Airbnb has been around for twelve years now and are clearly positioned at the top of their market, but there should be something suspicious about the decision to go public at a time when demand for travel is depressed.²⁸ But, again, investors shrugged that off and the shares more than doubled.²⁹ It wasn’t just giving Airbnb the benefit of the doubt, there seemed to be no doubt at all.

But what drives that level of confidence? The CEO himself admits that travel won’t look like it did in January of this year, so that would mean that Airbnb still has a lot to prove going forward. And if their path into the future is anything like the road they took to get to this point, we should be more concerned for what that could do to the housing market.

Airbnb was founded in 2008, at such a time when many people were buying homes as investment properties and having platforms to facilitate short-term rental transactions was a welcomed development. Though the housing market has obviously gone through some peaks and valleys since then, the appetite for real estate investing never went away and Airbnb provided an easy revenue stream for people who owned multiple homes. This effect has helped fuel housing inequality in many cities and exacerbated an affordability crisis at a time many people were still recovering from the Great Recession.³⁰ At a time of record homelessness³¹, is it wise to shower Airbnb with capital and an investor mandate to “figure it out”?

Airbnb has established a strong market share and is in position to expand on their services, and there’s no argument from me that there won’t be opportunity to grow from present revenues when travel ramps back up at some point, but growth starting from a place of having recently hemorrhaged money can still leave them in a hole. Yet Airbnb is now valued at more than Hilton, Marriott, and Wyndham combined.³² That should be alarming.

The Wisdom of Markets

A lot of people are making a lot of money right now in the stock market, but a lot more are kicking themselves for not jumping on the bandwagon sooner. In the absence of work, sports, or a social life, many investors have found a new identity in playing the markets³³, even if they lack a basic understanding of how these markets operate. They sought guidance on familiar channels like Reddit or Twitter and formed an entirely new minor-celebrity sphere around social media market punditry. It became an echo chamber of bad advice.³⁴

A lot of the loudest voices came from people who were new to this themselves.³⁵ They mistook early gains as proof of some innate skill to identify opportunity, then they projected that gospel of growth to a crowd that was gullible enough to make those same miscalculations. In the spring, while institutional investors sat on the sidelines, naïve retail investors splurged on zombie corporations³⁶ and mistakenly ran up prices in the wrong companies³⁷ because they couldn’t be bothered to do the most basic research before purchasing stock. After a while, the fabled smart money got tired of missing out on returns and jumped in themselves.³⁸

Virtually everyone with an opinion on the subject is currently facing some exposure to this market, which means that everyone is on the take, so to speak. No one wants to shout full blown panic and spark a massive sell-off³⁹ because that kind of correction would just hit their nest-egg too. So, we set new highs for tech IPOs this year⁴⁰ and smart people have found clever ways to rationalize how this will be different from the dot-com crash.⁴¹ But it’s that kind of feedback loop that feeds bubbles.

We approach the end of the year facing uncertainty in our ability to effectively produce, distribute, and administer a vaccine⁴², with unemployment figures trending in the wrong direction,⁴³ and with political instability tearing at an already damaged social fabric⁴⁴, but, hey, the markets are up and investors are showing boundless enthusiasm about a fresh slate of new IPOs in 2021, so we have that to look forward to.⁴⁵ Some cults died off by predicting The End would occur on some specific date that eventually passed without incident, but our present growth cult seems to believe that such a day will never come.⁴⁶

Note: the author is already aware that his opinions hold the same weight as a fart in the wind, albeit with less impact. Though he does engage in a great many vices, self-importance is not one.

^{1. It can be jarring to look at if you’re not expecting it, being just one letter off from curt}

^{2. Record highs across the board on the first of January}

^{3. The December 2019 U.S. jobs report was released in January and showed 3.5% unemployment, the lowest since the ‘60s}

^{4. Though Zoom only traded at $66.72 at the beginning of the year}

^{5. Which were silly and desperate and will likely be reflected upon as a gross misappropriation of resources}

^{6. The week ending 11-Dec-2020 took a modest dip off record highs set just the previous week, but all markets were well above the record highs being set a year ago}

^{7. Here is will I will cop to what liars refer to as taking an artistic license with the word ‘record’. At 6.7% unemployment last month, it was the worst November report since the 7% posted in November 2013, but that 6.7% percent is a particularly unreliable figure in 2020 and belies much deeper issues with employment during a surge in COVID cases}

^{8. Zoom closed at $397.01 on 11-Dec-2020}

^{9. COVID-19 cases are spiking and cities and states are beginning to shut back down, Trump refuses to concede to Biden, Senate-control is in flux until a January runoff election in Georgia, etc. No one can accurately forecast any one of those factors and how they’ll affect the economy, much less all at once.}

^{10. Goldman Sachs has a current price target on Tesla at $780, while JP Morgan just reset theirs at $90. It closed at $610 on 11-Dec-2020}

^{11. Another impossible forecast with its own set of chaotic variables}

^{12. Misinformation is the thin line between being Paul Revere or Chicken Little}

^{13. Cofounders CEO Tony Xu ($3.1B), Andy Fang ($2.8B), and Stanley Tang ($2.8B), visionary Stanford classmates who found an unprofitable way to assess a laziness tax. Surely among our best and brightest.}

^{14. A $60.2B market cap at close on 9-Dec-2020}

^{15. For those that got them. Despite all the Treasury’s self-congratulatory bullshit, it was a wildly inefficient rollout that needed a far more competent administration in order to succeed}

^{16. The federal government paid people to stay home and order their meals. As someone who continued to work in a city downtown during this period, I can say confidently that the only people on the streets during this time were construction workers and food runners.}

^{17. So much for establishing a new behavioral norm. As soon as the free money ran out and people got to step outside again, DoorDash went back to bleeding cash}

^{18. They also distribute hot bags to their workers, so there’s some value there. Sure, you could go pick up your own takeout food and avoid the surcharge, but you probably don’t have your own insulated bag to keep your food warm on the ride home.}

^{19. Said never: “You should try DoorDash! The food they brought me was shit, but man was it fast!”}

^{20. Each of the big four delivery companies (Door Dash, Grubhub, Uber Eats, Postmates) struggle to lock down exclusive customer bases, which should come as no surprise. None of them produce food.}

^{21. Sure, some are quick to point out that these jobs are a vital income stream to those workers, but us being so flippant about working conditions and fair wages echoes arguments we once made about sweatshop labor in China in the ‘80s and ‘90s. It should be of greater concern that we’re rationalizing that about domestic labor at a time when the Chinese middle class is ascendant}

^{22. Most of these merchants work with multiple services to expand their opportunities, and nothing short of a food-delivery monopoly will bring about meaningful exclusivity deals.}

^{23. All the food delivery apps offered big promotions that touted them as saviors to local small businesses when the shutdowns happened, but they were at the restaurant’s expense. When San Francisco instituted a 15% fee cap in April, DoorDash continued to charge 30% commissions for nearly three months. They eventually got a stern talking-to and agreed to pay the difference back to their merchants}

^{24. Trust me, restauranteurs get off on control, so self-reliance is a much sexier sell than asking them to cough up margin for an inferior service}

^{25. Uber Eats bought Postmates and Grubhub merged with Europe’s top player in the market, whose name is so stupid that I won’t even dignify it with a mention}

^{26. Biggest among them being cofounder and CEO Brian Chesky, who was reported to be worth $11.2B by close on 10-Dec-2020. He’s a visionary that considered how home ownership, long held as a rite of passage for families entering the middle-class, could be disrupted to serve as an investment vehicle for the wealthy and well-connected.}

^{27. Eggs and omelets}

^{28. The six biggest U.S. airlines reported losses that were nearly twice what they experienced after 9/11, to put things into perspective. Like daily COVID death rates, this is another statistic that we can measure in 9/11’s}

^{29. Airbnb opened for trades at $146 a share after the company priced its offering at $68}

^{30. Austin has been fighting short-term rentals for years with mixed success}

^{31. And with a federal moratorium on evictions set to expire in a few weeks}

^{32. At close on 11-Dec-2020: $83.19B cap for ABNB and a combined $76.03B cap for the big three (MAR $41.68B + HLT $29.05B + WH $5.3B)}

^{33. I don’t need to pay for analytics to know that “should I buy x stock” search queries shot up in 2020}

^{34. I don’t offer advice and, even if I did, you shouldn’t take it. I’m completely broke and own nothing of value. The only good advice I can offer is that you should never take financial advice from a broke person.}

^{35. Please let this be the end of Dave Portnoy}

^{36. Hertz is somehow still a thing!}

^{37. Shares in ZOOM (Zoom Technologies, Inc., a defunct Chinese company) saw a 50% spike in price at one point when people meant to buy ZM (Zoom Video Communications, who might as well be called Zoom Technologies, Inc.)}

^{38. Berkshire Hathaway purchased a record $9 billion in stock in Q3}

^{39. Outside of short sellers, of course, but if you were out there shorting the market this year then you’ve probably already jumped out of a window by now}

^{40. Surpassing a previous record from 1999, which is ominous}

^{41. These are more mature companies who have large revenue streams. Besides, everyone has learned their lesson since the last tech bubble. Can’t you just look around and tell how much smarter we are now? Back then the federal government had an annual budget surplus. What idiots!}

^{42. Or possibly multiple vaccines, another unknown}

^{43. On 10-Dec-2020 the U.S. posted 853,000 first-time jobless claims, the highest since September and blowing well past expectations around 730,000}

^{44. On 12-Dec-2020 in D.C., violent denial of the presidential election result led to multiple arrests}

^{45. One of the most anticipated is Robinhood, who’s become the face of the new breed of retail investor so it’ll be interesting to see what kind of valuation they’re anointed with. Odds are good that the zero-commission trading game isn’t a particularly profitable one, but the odds are also good that investors just won’t care.}

^{46. Which is equally as absurd as believing that Don Jr.’s dad legitimately won the 2020 election}