The free money virus turned investors’ brains to mush. But the healing has started, interest rates are recovering, QT is here, and look what we got.
By Wolf Richter for WOLF STREET.
Let’s just go through some of the already imploded stocks that imploded further on Friday. There were quite a few of them, as is now usually the case during the 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%, paring its loss for the week to just 5.6%, that kind of week. But a whole bunch of things plummeted after reporting “earnings” – I use that term loosely because they all reported huge losses on top of endless losses.
Carvana, an online used car dealer, is one of the earliest entries in my pantheon of imploded stocks. Thursday night it reported “earnings”[ads1]; – you know what I mean. Everything went wrong: the number of vehicles it sold to private customers fell, revenue fell, cost of sales jumped, gross profit plunged, SG&A expenses increased, interest expenses more than tripled, and net losses exploded to $508 million.
Used-car startups Carvana, Vroom and Shift “are facing an existential crisis,” I wrote in April 2022, based on the changing dynamics of the used-car market, the fading willingness of investors to keep fueling ATMs, and driven by the used-car startup even those that were never designed to make money and could never figure out how to make money, not even in the hottest used car market ever in 2021.
They were designed to burn investor cash. And investors no longer want their money to be burned. And such is the existential crisis now.
When I issued the existential crisis warning in April 2022, Carvana [CVNA] had plunged 73% from its high of $100 a share. Since then, they have plunged on with merciless brutality. On Friday, Carvana kathoomp surged 39% to $8.76, down 98% from its peak in August 2021, and down 41% from its April 2017 IPO. Buy and hold, folks.
The chart shows the now classic pattern of how the Fed’s trillions of dollars in QE and interest rate suppression – the free money era started in 2009 – mutated over the years into a virus that turned investors’ brains to mush and, after their brains had turned to mush, inflated asset prices to ridiculous levels.
But the healing from the free money virus has begun. Interest rates are returning to some sort of normal, QT is working now, and look what we got. Almost all charts of my imploded stocks look the same (data via YCharts):
In a market where investors’ brains are working properly, Carvana’s inability to make money selling used vehicles should have doomed the stock to penny-stock realm years ago.
Armies of falling knife catchers who thought they could cash in after shares plunged 73% in April 2022 have had their beloved fingers chopped off by a further 91%. Stocks have collapsed so far that you can barely see the 38% plunge on Friday, the small decline at the end of the collapse.
Twilio [TWLO], a cloud communications platform, reported “earnings” on Friday morning. Part of the problem was that revenue grew 32% to $983 million while net loss exploded 115% to $482 million. The company also provided disappointing revenue guidance.
How can a company that has been public for seven years, has been around for 14 years, and had $3.5 billion in revenue in the last 12 months, still generate a loss of $482 million on $983 million in revenue? It was a rhetorical question.
Every year, the company has generated bigger and bigger net losses, reaching almost $1 billion in 2021 and heading for well over $1 billion this year, following the free-money-virus-infected Silicon Valley model: the more they sell, the more they loser.
People who run companies this way have no idea what it’s like to run a profitable company. It’s not even on their horizon, and it wasn’t on the horizon of their investors. But it’s starting to happen.
Shares collapsed 34.6% on Friday, and are down 91% from their infamous February 2021 high, when these things started to unravel. Note the now classic Imploded Stocks bubble and collapse pattern. It’s just a simple fact: Free money turns investors’ brains to mush (data via YCharts).
Atlassian Corp [TEAM]a Nasdaq-traded collaboration and productivity software company in Australia is another one of those shining free-money examples that never figured out how to make money, never even tried, and just loses massive amounts of money years later. -years: In the past four years alone, it lost a combined $2.3 billion, even as revenue increased.
In other words, just buy your 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 earnings on Friday, the company talked about feeling the impact of the global economy — the decline in hiring at existing customers resulting in lower demand for its collaboration software — and it said the rate at which users of its free versions were converting to paid ones. versions were chilling. It said it would slow its own headcount growth going forward, giving a disappointing outlook.
Shares kathoomped 29% on Friday to $124.01 and are down 74% from peak mania last October. This chart looks very close to Carvana’s chart back in April when it had plunged to $100. Each implosion had a different start date and each plunge brought out the dip buyers who then had their fingers cut off and it will happen again because there are still dip buyers out there with a few fingers left on their hands that they want sliced off (data via YCharts):
Cloudflare, a cybersecurity company, reported earnings late Thursday — yes, another big loss. While revenue jumped 47%, the operating loss jumped 73%. The more they sell, the more they lose – following the Silicon Valley growth model of the free-money-virus era. The instructions were also easy.
But the free-money virus is fading and the brain is recovering, and on Friday shares fell 18.4% to $41.09, down 81% from last November’s peak.
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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