In short, the party ran out of trouble.
By Wolf Richter for WOLF STREET.
Here’s the problem with companies whose trending stocks have crashed 80% or 90%: they face an existential crisis. They can’t raise more money. But their operations were never designed to make money in the first place. Their business model was cash-burning, and everything was designed from the start to use in-house growth metrics to entice investors to buy the stock and increase the stock. Then the companies, based on their high price, could issue more shares and raise more money, and fuel their cash burning machine. The plan was to pretend until they could.
But with their stocks down 80% or 90%, they can’t fake it anymore, and they can’t sell any more stocks because nobody wants them, and they’re going to run out of money and can’t cover their expenses, then they cease to exist, and their shares will go to zero, unless they can get the money-outcontrolled flows, which implies a reduction in costs. And the fastest and most important places to cut costs are in staff and advertising.
If they fail to reduce their costs enough and keep their expenses below their income, they will eventually run out of money. And then that’s all.
But if they can reduce costs enough and reduce their staff and advertising and other things enough so that the costs line up, their revenue can go down, or go down even more, and then they can report income in declining, or faster declining revenue, and continued losses because revenue is now declining faster than expenses, and it all turns into a classic mess.
There are hundreds of companies in this position that went public during the hype era of money printing and interest rate repression, and they’re all basically facing the same existential crisis, although that each company has unique challenges, and in addition, all must meet the challenges of their industry.
Just to stick to one industry: Today, two “real estate tech” companies with crashing stocks announced job cuts: Compass and Redfin. Two others had mass layoffs earlier. Zillow, which is also in real estate tech, has been laying off people since last year when it emerged from its house flip fiasco, with layoffs occurring at least through April of this year. Unrepentant home pinball machine Opendoor suffered a series of layoffs in 2020, but recently announced no new layoffs.
They all have one thing in common: they have lost a lot of money every year of their existence as a publicly traded company.
red fin“the Amazon of real estate,” as CEO Glenn Kelman called it amid the 2017 pre-IPO scramble, announcement today that it would lay off 8% of its staff “today” because “it’s time to make some money”.
“We are losing a lot of good people today, but in order for others to want to stay, we need to increase the value of Redfin. And to increase our value, we need to make money,” he said.
Apparently there had been some kind of meeting to come to Jesus at the top, with “May require 17% less than expectations” and “not enough work for our agents and support staff”, and the drop in income means “less money for headquarters projects. Yes, Holy-Moly mortgage rates that just topped 6%.
Redfin has been a publicly traded company since July 2017 and has been around for 13 years as a startup, and it’s just now time to think about how to make money?
Good grief. I mean, Oopsespalooza. I mean, WTF. It’s the definition of what’s wrong with the whole hype-and-hoopla startup scene.
On the news, Redfin’s actions [RDFN] fell to a new closing low of $8.13. Back when it was still the Amazon of real estate, in 2017, it went public at an IPO price of $15. The shares briefly hit $30, then stuck around $20 for years.
But during the pandemic, the stock has met the miracles of the stock jockeys who plunged their stimmies into anything, the meme stock hunters and the hedge funds that followed them, and they all got a hoot and got catapulted the stock to $98.44 in February 2021, yes, that infamous February 2021, after which the bell crank ran out, and everyone very slowly started to sober up, and it all came unstuck. Since then, Redin shares have crashed 92%:
Compass announcement today – after they too apparently had a coming to Jesus meeting at the summit – the “removal” of 10% of its staff, or about 450 people. He said he would close his securities and escrow software company, Modus Technologies, which he bought in 2020, exit some office leases and halt new acquisitions, “to move towards profitability and positive free cash flow”.
The real estate brokerage was backed by SoftBank and had raised $1.5 billion before the IPO, which it then spent, plus the money it raised in the IPO, to buy back real estate brokers and hire brokers from other brokers.
So now he wants to cut costs to achieve positive cash flow and profitability after he couldn’t make any money in what for years has been the hottest housing market of all. the times, when people paid no matter what buy no matter what, seen-invisible, exempt from inspections, no questions asked?
He’s facing an existential crisis because his stock has crashed and he can’t raise new cash to burn, and the housing market has turned south, with demand falling amid rates Holy-moly mortgages by over 6%, and home sales are going to be far fewer and much harder to come by.
On news that Compass is now trying to find a way to cut costs to achieve cash flow positive as revenues take a hit and its false growth model has collapsed, shares soared 10.5% , at $4.26 per year. shares, down 81% from the high reached on the day of the IPO. Pretty much every investor who’s ever touched this has been shaken:
Zillow made no additional layoff announcements today, but given the conditions the housing market is currently facing and the fate of Redfin and Compass, its shares fell 6.2% today, to 30, $22, down 86% from its meme-stock-stimmie-miraculous February 2021 high, and back to where it first was in 2013. It probably saw something coming in its vast housing market data when he decided to get out of the house flipping business last year:
Open door technologies, the home pinball machine that decided to stay in the home pinball business – because what else is he going to do? — also did not announce any layoffs today. Its shares are up 2 cents from its all-time low yesterday at $5.04, down 87% from its peak which occurred in, you guessed it, February 2021.
The company now faces the awkward challenge of selling thousands of homes it bought in the hottest real estate market ever, but now there are those new saint-moly mortgage rates, and the price cuts spread, inventory goes up and volume goes down, and everything is going to get a lot harder than before.
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