Unicorn or Incumbent?

Which is better, a sparkly new unicorn company, or a tried and true incumbent? Microsoft went public in 1986, and the stock went for an adjusted $0.12/share – today it trades for $304. My calculator seized up when I tried to determine the percentage gain. We all wish we had sniffed out how successful this once-unicorn would become. On the flip side, I remember the day in early 2000 when pets.com, a glitzy but unprofitable company with a stratospheric valuation, went public. Pets.com went out of business later that year, and became a symbol of how ridiculous the technology space had become, riddled with young, unprofitable, poorly run companies. The list of long-standing companies, however, that have gone bankrupt or even completely out of business is also long – Lehman Brothers and Kodak come quickly to mind. But some of the best performance returns still come from well-established companies. We hold several stocks with dizzying 5-year total returns: Lam Research +594%, Applied Materials +425%, Estee Lauder +354%, and United Health +212%. So what’s an investor to do – seek out the next colorful unicorn, or find a well-run growth company with a proven track record?

The transition to more clean energy is not a fleeting trend, but here to stay, and has good examples of both unicorns and incumbents. Last quarter Tesla, which finally posted a profit in 2020, generated $13.8 billion in revenue, while Ford generated $35.7 billion. Ford manufactured its first car in 1903, and Tesla produced its first car over a hundred years later in 2009. Notably, they are the only two American automakers that have avoided bankruptcy. Both are pioneers: Ford introduced the moving assembly line which increased production levels, while Tesla similarly pioneered electric vehicle production. Both companies inaugurated mass-market vehicle availability for the middle class. Henry Ford, who had previously worked for Thomas Edison, made an electric vehicle in 1901. But it took Tesla nipping at their heels over a hundred years later to push Ford into the mass-market electric vehicle space. Today, you can buy a pretty cool electrified Mustang Mach or F-150 truck.

The young, innovative energy of unicorns is perfectly married with the knowledge and experience of incumbents. The synergies created by these competitive connections are amazing as they each push for improvement. Both face the daunting challenge of achieving sustainable business models and profitability. And as Elon Musk says, “prototypes are easy, production is hard, and being cash-flow positive is excruciating.” There are many ways to succeed as an investor, but I believe that companies with little or no debt, good earnings growth, and rock-solid cash-flow, perform better over time. And all of these companies initially started out as unicorns, so it is best to remain open minded!

By the way, Merrill Lynch was the lead underwriter for pets.com, and their analysts maintained a buy rating throughout 2000 as the stock tumbled. It was a conflict of interest for sure, and another good reminder to consider the source of information about stocks, because often it is driven by marketing and is not good investment advice.

Sources: Refinitiv, https://www.thehenryford.org/

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