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BEWARE: 'The Uber Syndrome'

Feb 9, 2016

In this issue:
» GDP growth numbers - The real challenge
» Government mulls share buybacks in state run companies
» ...and more!
0:00
Madhu Gupta, Research analyst

Technology is changing fast. And the companies leading the change are in the spotlight.

A new term - 'The Uber Syndrome' - refers to a scenario where a company with a distinct business model changes the dynamics of an industry.

Taxi-aggregator Uber is changing the face of commuting. By offering the convenience of comfort and price, its popularity has surged in recent times. So much so that global car manufacturers like General Motors and Ford are beginning to feel the heat.

Similarly, other ecommerce companies are challenging traditional business models.

No doubt these new-age tech companies are simplifying people's lives. But unfortunately, they are often perceived as invincible.

Consider the FANG (Facebook, Amazon, Netflix, and Google) stocks that are presently riding high on the digital wave. These stocks are touted as the most resilient on Wall Street. Back home, the Flipkarts and the Snapdeals are grabbing a lot of investor interest.

But herein lies the honey trap: Many of these 'disruptive' companies are yet to turn profitable.

The allure of rich returns has stretched these stocks too far. When valuations aren't in line with the underlying fundamentals, the result is the destruction of shareholder wealth.

History proves that the herd mentality leads investors astray. Millions of investors were crushed in the 1920 auto bubble, the 1960 semiconductor bubble, and the 2000 dot-com bubble.

So how can one profit from game-changers without falling into the value trap?

The key is not to get carried away by the frenzy. Instead, take a hard look at fundamentals and viability before putting in your money in these companies.

Since FY15, a number of companies with niche business models have tapped the capital markets with IPOs. Many of them are pioneers in their respective segments with virtually no competition from existing players. Quite a few of them also have an impressive profit track record.

Naturally, investors are keen to invest in these companies to benefit from their future growth. But we at Equitymaster have been very conservative in evaluating companies with distinct business models.

Instead of banking on past financials, we focus on future potential, performance consistency, and management quality. We usually advise investors to avoid the issue if the company is inadequate in one or more of these parameters.

We agree with Warren Buffett when he says IPOs are not a good investment as they favour the seller.

Do you think that technological disruptions provide huge investment opportunities? Let us know your comments or share your views in the Equitymaster Club.


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2:30 Chart of the day

We are approaching that time of the year when one takes stock of one's performance and sets the targets ahead - the end of financial year 2016, and the beginning of FY17.

The year began with a lot of hopes. However, reality struck, though with a lag. Be it markets, investment data, order books, trade data, different surveys indicating the mood and economic atmosphere, all suggest pessimism, but for one data - the new GDP. One seriously needs to think how the whole can be better when the parts are deteriorating.

As per the revised formula, India is expected to grow by 7.6%. This is better than the initial estimate of 7% to 7.5% growth, and implies that the growth in the quarter ended March 2016 should be 7.8% YoY. One must also note that this is much higher than the growth of 7.3% in the third quarter, which happens to be the festive season. What makes the target significant is that at this rate, India will be the fastest growing economy in the world, surpassing even China.

While we have our reservations about this new GDP, even if we take it at the face value, there are reasons to be concerned.

As an article in Business Standard suggests, in nominal terms, the revised GDP growth is much lower than 11.5% estimated in the Budget. To achieve the Budget target, the Government will need to reduce its expenses. This could be a daunting task, keeping in mind the burden due to implementation of One Rank One Pension for retired Army personnel and the Seventh Pay Commission recommendations. All in all, just looking at the GDP numbers to assess India's economic health and prospects does not seem like a good idea.

Should You Take GDP Data at Face Value?

3:30

Despite the poor market sentiments, it is raining IPOs. Most of these, even the ones yet to turn profitable, have been oversubscribed.

An interesting parallel development that is happening is Government mulling over share buybacks in state run companies. Despite the poor governance, a lot of these companies are cash rich. As per an article in Business Standard, around 50 listed state run companies have cash and liquid investments worth Rs 2 trillion. In times when the global economic environment and concerns of the same have led to massive correction in stock prices, it could be a good opportunity for these firms to use cash to consolidate ownership. While it is hard to predict when things will turn around for these firms earning them investors' favour, effective use of cash is likely to improve valuations and per share earnings for them.

4:00

Indian stock markets opened the day in the red and continued to trade on a negative note. At the time of writing, the BSE-Sensex was trading lower by about 290 points (down 1.2%), while the NSE-Nifty was trading down by 85 points ( down 1.2%). Barring oil & gas, major sectoral indices are trading in the red with stocks from the information technology and metal space facing the maximum brunt.

4:30 Today's Investing mantra

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Richa Agarwal (Research Analyst).

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