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Hit and myth - Investors should be careful about believing in modern-day unicorns

22/09/2015

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Back in the Middle Ages, it was widely believed unicorn horns had the power to heal the sick and make poison water drinkable, which ultimately led to specimens changing hands for huge sums of money. Since unicorns are of course mythical beasts, this was bad news for the narwhal whose own ‘horn’ – the protruding tooth on its forehead – was often held out as being ‘the real thing’. 

Fast forward to our supposedly more enlightened age and you will still find unicorn parts changing hands at eye-watering valuations. Today, however, the term ‘unicorn’ is used to refer to unlisted start-up businesses – typically to be found in the technology arena – that have reached the magic paper valuation of at least $1bn (£645m). 

According to The Unicorn List, only created by Forbes in January but updated by the magazine numerous times since, there are now more than 130 unicorns in existence and even a dozen or so ‘decahorns’ – that is, unlisted businesses valued in excess of $10bn. Forbes warns that the valuations of these companies are “in constant flux” but calculates the current total valuation as some $505bn. 

Now, you can do all sorts of things with $505bn. Continuing with our theme, for example, you could buy 10 million thoroughbred horses at $50,000 a pop and use the spare $5bn to fashion and attach bespoke horns onto each one, thereby creating your very own, very large DIY ‘blessing’ – and, yes, apparently there really is a genuine collective noun for a group of unicorns. 

Serious inroads 

More in keeping with our typical focus here on The Value Perspective, $505bn would enable you to make serious inroads into the stockmarket. Working up from the smallest member of the FTSE350, for example, you would be into the foothills of the FTSE100 before you ran out of cash – picking up stocks such as Cobham, Meggitt and Stagecoach, with their combined and very real profits of $25bn. 

Alternatively, if it is gambling you are after – and, to our way of thinking, investing in many of these unicorn companies would certainly be akin to speculation – then why not acquire Betfair, Ladbrokes, William Hill and others? In fact, with $505bn in your pocket, you could buy the entire listed UK betting industry 40 times over and still have a bit left over for a flutter on the 4.20 at Haydock. 

Or else you could buy the whole listed diamond sector and its associated reserves three times over and leave enough change for three Tiffany’s – not items of jewellery but the jeweller itself. In short, $505bn is a chunky valuation and, while some of these unicorns may well prove successful businesses and sound investments, on aggregate would we expect a good return on that outlay? We would not. 

For one thing, some unicorns are not even making a profit – according to the FT, one $15bn player is thought to have lost three times its revenue in the first five months of 2015. For another, surely some of these valuations are conflicting. Can Uber really be worth $50bn, for example, when competitors Didi Kuaidi, GrabTaxi and Lyft are worth $20bn combined? Just how many taxi rides can a person take? 

Magical mark 

Even if a business has not made it to the magical $1bn mark, it can still boast a unicorn-like valuation. Take US mattress maker Casper, which will deliver one of its $500-$900 “sleep surfaces” free to your door. Needing to win market share equivalent to 100% of the entire UK sleep surface market to justify its $550m valuation, we fear returns may prove as substantial as its namesake, the friendly ghost. 

Clearly we do not believe in unicorns of any kind here on The Value Perspective so let’s finish things where we began – in the Middle Ages. Coming across some unicorns on his travels, Marco Polo observed: “‘Tis a passing ugly beast to look upon, and is not in the least like that which our stories tell of … in fact, 'tis altogether different from what we fancied.” 

As you may have guessed, what the great explorer had mistaken for unicorns were in fact rhinos – a neat metaphor for the modern-day unicorn hunter who could well end up with a beast – or at any rate a valuation – that is altogether different from what they fancied.

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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