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How is this article on the front page of HN? It conflates cash flow with net income, and shows a lack of understanding of the business models of these companies

How is this article on the front page of HN? It conflates cash flow with net income, and shows a lack of understanding of the business models of these companies. Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?" This shows a fundamental misunderstanding of how public markets work.

tarsinge 6y ago
I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.
sillysaurusx 6y ago
Your comment isn't really saying anything, though. It can be summed up as "Nu uh." Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?
- tylerhou 6y ago
  Because many of the businesses are profitable, but spend money to grow. Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings. Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork). I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times! [1] http://paulgraham.com/aord.html http://paulgraham.com/aord.html
  - piker 6y ago
    > Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. Do you have a citation for that bold assertion or want to prove it? [EDIT: The linked chart shows Uber losing 8.5 billion in FY 2019. This 80% figure implies approximately 10 billion in engineering salaries, or 10k engineers making 1 million a year.]
    - tylerhou 6y ago
      Sorry, you're right that Uber would have to do more than lay off engineering staff. It would also have to scale down marketing, promotions, etc. This would of course screw over any long term growth prospects they might have. But my general point still stands — if it were not for chasing growth, Uber is just barely profitable right now. The original article cites revenue numbers without understanding the business fundamentals. In Uber's case, its 2019 losses are severely misleading. $3.6 billion of those losses were losses associated with performance-based equity compensation around its IPO [1, p. 55]. According to GAAP, they losses for 2019, but in reality they should be amortized across the previous few years. The costs associated with engineers (I assume "research and development") are listed as $4.8 billion. This means by just cutting engineering Uber still is in the hole by around $3.7 billion per year. But if you throw away all the engineers, your growth prospects are screwed anyway, so you might as well throw away most of marketing as well ($4.6 billion), at which point you're in the green by $0.5 billion [1, p. 64]. You could also save much of the $0.5 billion you're spending on administrative overhead, so maybe Uber is profitable by $1 billion or so. [1] https://s23.q4cdn.com/407969754/files/doc_financials/2019/ar/Uber-Technologies-Inc-2019-Annual-Report.pdf https://s23.q4cdn.com/407969754/files/doc_financials/2019/ar...
  - mabbo 6y ago
    > Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. I think we're going to find out if that's true or not.
  - rtempaccount1 6y ago
Apocryphon 6y ago
On a purely emotional level, people are not happy about the layoffs (among other things going on in the tech industry) and this validates conceptions of this tech bubble being built on creative accounting, revealing hyper-growth hype to be nothing but lies. There is schadenfreude in calling out the emperor for having no clothes.
hn_throwaway_99 6y ago
> This shows a fundamental misunderstanding of how public markets work. I disagree. Most importantly, what we are seeing with so many companies being unprofitable is historically unusual. Now, I guess in 2020 everything feels "historically unusual", but it's kind of BS to denigrate someone by saying "they fundamentally misunderstand how public markets work" when the public markets didn't work this way until quite recently. See https://markets.businessinsider.com/news/stocks/ipos-for-unprofitable-companies-have-hit-tech-bubble-levels-baml-2019-10-1028596996 https://markets.businessinsider.com/news/stocks/ipos-for-unp...
pwdisswordfish2 6y ago
Oh, we can see how they work. That is the problem. What you mean is there is a fundamental disagreement over how they should work.
- ksj2114 6y ago
  No, saying how did we "allow" these companies to IPO shows a misunderstanding of how markets work
  - pwdisswordfish2 6y ago
    Perhaps we are all being loose with terminology, but the article used the term "why" not "how". The question is why, not how. In hindsight, we can question the decision-making.

tarsinge 6y ago

I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.

sillysaurusx 6y ago

Your comment isn't really saying anything, though. It can be summed up as "Nu uh." Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?

tylerhou 6y ago
Because many of the businesses are profitable, but spend money to grow. Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings. Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork). I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times! [1] http://paulgraham.com/aord.html http://paulgraham.com/aord.html
- piker 6y ago
  > Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. Do you have a citation for that bold assertion or want to prove it? [EDIT: The linked chart shows Uber losing 8.5 billion in FY 2019. This 80% figure implies approximately 10 billion in engineering salaries, or 10k engineers making 1 million a year.]
  - tylerhou 6y ago
    Sorry, you're right that Uber would have to do more than lay off engineering staff. It would also have to scale down marketing, promotions, etc. This would of course screw over any long term growth prospects they might have. But my general point still stands — if it were not for chasing growth, Uber is just barely profitable right now. The original article cites revenue numbers without understanding the business fundamentals. In Uber's case, its 2019 losses are severely misleading. $3.6 billion of those losses were losses associated with performance-based equity compensation around its IPO [1, p. 55]. According to GAAP, they losses for 2019, but in reality they should be amortized across the previous few years. The costs associated with engineers (I assume "research and development") are listed as $4.8 billion. This means by just cutting engineering Uber still is in the hole by around $3.7 billion per year. But if you throw away all the engineers, your growth prospects are screwed anyway, so you might as well throw away most of marketing as well ($4.6 billion), at which point you're in the green by $0.5 billion [1, p. 64]. You could also save much of the $0.5 billion you're spending on administrative overhead, so maybe Uber is profitable by $1 billion or so. [1] https://s23.q4cdn.com/407969754/files/doc_financials/2019/ar/Uber-Technologies-Inc-2019-Annual-Report.pdf https://s23.q4cdn.com/407969754/files/doc_financials/2019/ar...
- mabbo 6y ago
  > Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. I think we're going to find out if that's true or not.
- rtempaccount1 6y ago

Apocryphon 6y ago

On a purely emotional level, people are not happy about the layoffs (among other things going on in the tech industry) and this validates conceptions of this tech bubble being built on creative accounting, revealing hyper-growth hype to be nothing but lies. There is schadenfreude in calling out the emperor for having no clothes.

hn_throwaway_99 6y ago

> This shows a fundamental misunderstanding of how public markets work. I disagree. Most importantly, what we are seeing with so many companies being unprofitable is historically unusual. Now, I guess in 2020 everything feels "historically unusual", but it's kind of BS to denigrate someone by saying "they fundamentally misunderstand how public markets work" when the public markets didn't work this way until quite recently. See https://markets.businessinsider.com/news/stocks/ipos-for-unprofitable-companies-have-hit-tech-bubble-levels-baml-2019-10-1028596996 https://markets.businessinsider.com/news/stocks/ipos-for-unp...

pwdisswordfish2 6y ago

Oh, we can see how they work. That is the problem. What you mean is there is a fundamental disagreement over how they should work.

ksj2114 6y ago
No, saying how did we "allow" these companies to IPO shows a misunderstanding of how markets work
- pwdisswordfish2 6y ago
  Perhaps we are all being loose with terminology, but the article used the term "why" not "how". The question is why, not how. In hindsight, we can question the decision-making.