Stock market investors that choose to manage their own investments face a series of choices. The first is whether to abdicate the responsibility for picking individual stocks to professional managers or an index of stocks. In the former case investors look to mutual or exchange traded funds and in the latter case an index fund that tracks the performance of a sector without professional management input.
Investors bold enough to venture forth on their own also face choices. The first is to stick with tried and true blue chip stocks with proven track records of steady, if less than spectacular, returns like the Big Four Banks. Those who wish to shoot for the stars scour the financial news for any hint of a company with the potential of massive rewards, often ignoring the accompanying massive risk.
The viability of searching for these kinds of stocks was validated in the classic investing tome from renowned US investor Peter Lynch. In his landmark work, “One Up on Wall Street’, he introduced the term “ten bagger” into the investing lexicon. Ten baggers were investments that returned ten times the amount of money initially invested and became a kind of holy grail for individual investors committed to doing their own stock picking.
In a sense the quest for the elusive ten baggers is all about seeking the heat. Market experts tell us emerging markets are “hot” so off we go. Certain sectors heat up when whatever business in which they are involved experiences a sea-change in demand.
Many Aussie investors learned the hard way that hot sectors attract not only investors looking for massive rewards, but newly minted companies of questionable value as well. During the height of the mining boom the ASX IPO (Initial Public Offering) market was flooded with mining start-ups, many coming to market with no more than a property deed and a drilling license. The mere promise of cashing in on China’s seemingly insatiable demand for iron ore drove up the prices of junior miners, only to later crush the hearts of investors.
A heat source of more recent vintage is characterized by a term introduced by a Harvard Business School professor back in 1997 – disruptive technology. Time has muddied the original meaning of the phrase but at its heart a “disruptive technology” is a product or process that changes the traditional means of getting something done.
A contemporary example of the term is “Fintech”, or financial technology. Traditional banking methods have been disrupted by new processes for getting financial tasks accomplished. What could be safer than investing in a company about to change history?
Among other things, cash and competition come to mind. The fact is the path of underperforming ASX stocks is littered with disruptors that simply didn’t disrupt. Perhaps nowhere is the phrase “it takes money to make money” more appropriate than in the world of start-up businesses. In addition, many potential disruptors have competition, sometimes hidden from the view of investors as privately held companies.
The following table lists five stocks that to date have failed dramatically to deliver on their disruptive promises.
All these companies share a problem evident in far too many start-ups of all stripes – not enough revenue and too little cash flow to operate. Yet all the disruptors in our table began their ASX ride with great promise, with 1-Page Limited (1PG) coming in with a gold-plated pedigree,
The company is, or was, a US based tech start-up with the promise of revolutionising the way businesses recruit, hire, and promote employees. Its origins in California’s tech haven known as the Silicon Valley had visions of the next Seek Limited (SEK) dancing in the eyes of thousands of Aussie investors. Seek Limited truly disrupted the job search process for both employees and employers and dramatically curtailed ad revenue for print media outlets.
1-Page offered two software suites to its customers, sold as a service (SAAS), meaning customers essentially rented the product rather than buying it outright. 1-Page Source is a tool for assessing talent from within and without an organization and the 1- Page Proposal platform lets companies pose business problems unique to them to applicants from within and without and allow them to prepare a one page solution.
The following price movement chart shows the astronomical rise and equally meteoric fall of this promising company.
The first glimmers of trouble missed by many investors was the buy-in behavior of the company’s impressive client list. Specifically, it appears some were evaluating the platform and not enough were moving to full commitment. Like all the companies in the table, operating cash flow posed a challenge which 1-Page simply could not overcome. Management problems over the role of the company’s founder and a 2016 hostile raid on the stock accelerated the collapse. The company went into a trading halt in March pending plans to take the company private or simply disband operations and sell the remaining “shell” for a reverse IPO. As of 15 May, the AFR (Australian Financial Review) was reporting shareholders had voted to close the company.
When the 1-Page stock price soared to near $5 per share speculation was already rampant in anointing a variety of company stocks as the “next 1-Page”.
One of them was Reffind Limited (RFN). The pitch here is revolutionising the way companies communicate with their employees with software platforms using mobile phones as the conduit. The notion of replacing staid emails, boring online training sessions, voice mails, and other forms of traditional employer to employee communication modes with short and entertaining mobile messaging was seductive enough to attract heat-seeking Aussie investors in droves. The stock price got out of the gate and skyrocketed. Here is the chart.
Early in the game one of the company founders teased investors with the hint of profitability as soon as 2016, a mark the company missed by so much as to make the earlier hint laughable. The share price began to collapse as the company’s cash flow problems became evident. Burning cash at an alarming rate to keep the company operating is not a phenomenon unique to disruptors. A capital raise in April of 2016 did little to stem the long-term hemorrhaging of cash while investors awaited greater adoption of a revolutionary human resources effort that may not be catching on within the business world.
Newzulu Limited (NWZ) is another example of a potentially disruptive technology in search of enough cash to continue to operate while awaiting increasing revenue and profitability. This company has a software platform enabling it to take advantage of two existing disruptors in modern life – social media and crowdsourcing. Essentially Newzulu solicits for a fee videos, photos, and written content from social media users which the company in turn provides to media outlets. The company already has enlisted an impressive “crowd” of more than 150,000 photographers, freelance writers, and ordinary people in more than 150 countries to record news events and interesting stories. In addition to the ability to offer this huge variety of news items Newzulu has a platform media outlets can use to search social media for specific results.
Despite this promise Newzulu’s appeal to investors was not strong enough to escape the inevitable concerns arising from the combination of low revenues and operating cash flow and high operating expenses. Here is the chart.
Not content to await results from its existing capabilities the company burned cash on acquisitions and by April of 2016 turned to its partner organization for cash. Management had enticed investors with news of the acquisitions and content deals along with reported increases in users of the company’s platform. Positive revenues in FY 2016, up from 2015, were not enough to avoid another year of profit loss. In early May of this year the company announced a capital raise for the purpose of increasing sales staff and lowering its debt.
1-Page, Reffind, and Newzulu had one significant advantage that as yet has not borne fruit – they have, or had in the case of 1-Page, no major competition. This is not the case with the remaining two companies.
Few would argue that the rise of mobile payment technologies is already and will continue to disrupt traditional means of payment and money transfer. eServglobal operates in this space, along with numerous competitors around the world, many with solid financial backing.
eServ’s core business is providing mobile payment technologies to Telco’s and finance companies around the world. In addition, the company partners with Master Card in the Homesend global network for both consumers and corporations to transfer money via a single connection. Master Card uses Homesend for its own money transfer offering, Master Card Send. eServ’s Mobile Money platform focuses on consumers in developing countries shut out of traditional banking methods for paying bills and transferring money. Unfortunately for investors Mobile Money as yet has failed to live up to its promise.
Estimates for the size of the global market for money transfers run as high as $22 trillion dollars, but the digital age has ushered in competitors by the dozen. The world leader is still venerable Western Union (NYSE: WU). Investors impatient with the performance of eServ would do well to remember Western Union has been in the money transfer business for more than 150 years, while eServglobal entered the market in 2015, which did not help the stock price as you can see in the following chart.
The process of one individual loaning money to another – peer to peer or P2P lending – has been around for centuries but the commercialisation of P2P lending exploded following the GFC. Conditions for growth were ideal with people with cash to invest facing a risky stock market and diminishing interest rates and people in need of a loan with banks restricting lending to only those who could prove they didn’t need a loan.
The business model is elegantly simple. Take money from investors at an interest rate varying on risk and make loans to people in need with interest rates also varying on risk. Direct Money Ltd (DM1) was the first P2P lender to list on the ASX but privately held Society One could list in 2017. Direct’s business model differs from the norm in that the company maintains an income fund from which it makes loans which are then sold to individuals or institutions. In theory, this shields investors but not shareholders from default risk.
Direct Money got off to a typically fast start, as most disruptors do, and followed the path downward as have many others. Here is the chart.
Some market commentators claim the Direct Money’s interest rates to borrowers are not significantly better than traditional bank rates, but the real challenge for DM1 lies elsewhere – competition. Investors who bought into the company based on a perceived “first mover” advantage missed the point that the supposed advantage related only to the ASX. At the current time, Direct Money has no less than eight major competitors, all arriving within the last five years.