The free money bug has turned investors’ brains to mush. But the healing has started, interest rates are recovering, QT is here, and look what we have.
By Wolf Richter for WOLF STREET.
Let’s just review some of the already imploded stocks that imploded again on Friday. There were quite a few, as is usually the case in earnings season, but we’ll only look at a handful. They imploded even as the markets rallied for the day. On Friday, the Nasdaq rose 1.3%, reducing its loss for the week to just 5.6%, that kind of week. But a whole bunch of stuff took a dive after reporting “profits” – I use that term loosely because they all reported huge losses on top of endless losses.
carvana, an online used-vehicle retailer, is one of the earliest entries in my pantheon of imploded stocks. Thursday night he reported “earnings” – you know what I mean. It all went wrong: the number of vehicles sold to retail customers plummeted, revenues plummeted, cost of sales soared, gross profit plummeted, selling and administrative expenses skyrocketed, interest expense more than tripled and net loss exploded to $508 million.
Used car startups Carvana, Vroom and Shift are “facing an existential crisis,” I wrote in April 2022, based on changing used vehicle market dynamics, waning will investors to continue fueling the cash and drive burning machines by the used vehicle startups themselves who were never designed to make money and could never figure out how to make money money, not even in the hottest used-vehicle market of all time in 2021.
They were designed to burn investors’ money. And investors no longer want their money burned. And so this existential crisis is now.
Back when I issued the existential crisis warning in April 2022, Carvana [CVNA] had plunged 73% from the high at $100 per share. Since then, they have plunged further with relentless brutality. On Friday, Carvana broke 39%, to $8.76, down 98% from the August 2021 high and down 41% from its April 2017 IPO price. Buy and hold, the friends.
The chart shows the now classic pattern of how the Fed’s trillions of QE and interest rate repression – the era of free money began in 2009 – has mutated over the years into a virus that turned investors’ brains to mush, and after their brains turned to mush, they inflated asset prices to ridiculous levels.
But the cure for the free money virus has begun. Interest rates are back to some sort of normal, QT is working now, and look what we have. Almost all of my imploded stock charts look the same (data via YCharts):
In a market where investors’ brains are functioning properly, Carvana’s inability to make money selling used vehicles should have doomed the stock to the realm of penny stocks years ago.
Armies of droopy-knife grabbers who thought they could make a buck after stocks fell 73% in April 2022 have had their beloved fingers chopped off with another 91% plunge. Stocks have crashed so much you can barely see the 38% drop on Friday, that little dip at the end of the crash.
Twilio [TWLO], a cloud communications platform, reported “earnings” on Friday morning. Part of the problem was that revenue rose 32% to $983 million while net loss soared 115% to $482 million. The company also released disappointing revenue forecasts.
How can a company that’s been listed for seven years, been around for 14 years, and made $3.5 billion in revenue in the last 12 months still make a $482 million loss out of $983 million dollars in revenue? It was a rhetorical question.
Each year, the company has generated increasingly large net losses, reaching nearly $1 billion in 2021 and heading towards more than $1 billion this year, following the model of Silicon Valley infected by the free money virus: the more they sell, the more they lose.
People who run businesses this way have no idea what it’s like to run a profitable business. It’s not even on their horizon, and it wasn’t on their investors’ horizon. But it’s starting to be.
Shares tumbled 34.6% on Friday and are down 91% from their peak in that infamous February 2021 when it all started to unravel. Note the now classic bubble and bust pattern of imploded stocks. It’s just a simple fact: free money turns investors’ brains to mush (data via YCharts).
Atlassian Corporation [TEAM]a Nasdaq-listed Australian collaboration and productivity software company, is another one of those shining examples of free money that never figured out how to make money, never even tried, and just lose money. Huge sums of money year after year: In the past four years alone, it has lost a combined $2.3 billion, even as its revenue has surged.
In other words, he is just buying his income. And for a while, that was all that mattered to investors whose brains had been turned to mush by the free money virus.
But when it reported results on Friday, the company said it was feeling the impact of the global economy — slower hiring at existing customers leading to slower demand for collaboration software — and it said the rate at which users of its free versions were converting to paid versions was cooling. He said he would slow his own workforce growth going forward, and he gave a disappointing outlook.
The shares jumped 29% on Friday to $124.01 and are down 74% from the October mania peak of last year. This chart looks awfully close to Carvana’s chart in April, when it dipped to $100. Each implosion had a different start date, and each dive brought out dip buyers who then had their fingers sliced off, and it will happen again because there are still dip buyers out there with a few fingers left on their hands they want to be sliced off (data via YCharts):
Cloudy, a cybersecurity company, announced its results on Thursday evening – yes, another huge loss. While revenue jumped 47%, operating loss jumped 73%. The more they sell, the more they lose – following the growth model of Silicon Valley in the era of free money. The tips were also light.
But the free money virus is fading and brains are recovering, and on Friday its shares jumped 18.4% to $41.09, down 81% from November’s peak of Last year.
The stock is about eight months behind the first batch of heroes in my pantheon of imploded stocks that began to unravel in February 2021 (data via YCharts):
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