Ron was working with the discount retailer Target before Steve Jobs picked him up to work for Apple. Ron is widely credited with developing the concept of the Apple Store, Apple’s super-successful brick-and-mortar retail gambit.
After exiting Apple, Ron tried to recapture his retailing magic as he set up Enjoy Technologies with a vision of “commerce at home”, which offered busy customers a chance to have an Apple Store-like experience in their living rooms. Ron had once boasted that “Enjoy’s mobile store can do anything you can do in a store, but better.”
Enjoy Technologies went public in October 2021 through a SPAC (Special Purpose Acquisition Company), getting a valuation of USD1.1 billion. Last Thursday (only eight months later), it hastily filed for Chapter 11 bankruptcy protection. It had less than USD1 million in cash and has requested the US federal court to approve a USD55 million loan so that it can meet payroll this week for its 1,700 employees.
A SPAC is a company without commercial operations and is formed strictly to raise capital through an initial public offering. Such companies are also known as “blank cheque companies” as at the time of listing, they do not have business operations or stated target for acquisition. They typically have two years to complete an acquisition, or they must return the funding to investors.
SPACs have existed for several years, but they gained prominence only recently as legions of day traders and other ordinary investors began trying their luck on more speculative businesses. According to SPAC Research, only 59 SPACs got listed in 2019. That increased to 248 in 2020, and to a whopping 613 in 2021. With the bubble bursting, the issuances have come crashing down; in June 2022, there were only three SPAC IPOs and they managed to raise only USD400 million (compared to USD162 billion in 2021).
Enjoy Technologies is not alone in this. Last month, carmaker Electric Last Mile Solutions also filed for bankruptcy, just a year after going public at a USD1.4 billion in valuation. With the funding drying up for the speculative early stage, it is unlikely that these are the last ones to go under. In fact, less than 10 per cent of companies that have listed through SPACs since January 2020 are trading at or above IPO valuations.
Nevertheless, this brings us to a more important issue at hand. Johnson’s plan to run with “if you deliver the highest quality you can imagine, you will have a great business forever” is troublesome on many levels. And we often find such oversimplifications in investing too.
One of the more common ones we come across is a belief that “a good company is a great investment at all points in time”. Investors often go with the assumption that their investing job ends with the search for a great company; maybe one that has grown revenues and profits at a certain clip or has generated return ratios above a certain number. Once you have managed to find a great business, the price you pay for buying that business is irrelevant, or so the belief goes.
The problem is that that belief has not stood the test of time. A lot of great businesses have had multiple years (sometimes decades) when their earnings kept growing, but the stock gave near-zero returns. Here are some examples: Coca-Cola (1998-2016), IBM (1999-2010),
(1999-2010), (1994-2009), L&T (2007-2016), (2009-2020), (2000-2018), Dr Reddy Labs (2015-2020), (2008-2014, 2015-2020), and the list goes on.
Another such over-simplification is a belief that investment in certain sectors can permanently be more return-accretive than others. Between 2014 and 2019, many investors subscribed to the narrative that investing in consumption-facing businesses is inherently more profitable than anything else.
That belief was not without cause. During the taper tantrum market correction (2014-15), the consumption-facing businesses (FMCG and Consumer Durables) were the best performing ones, and they did even better when the markets picked up steam post-2016. Such was the belief that many commentators declared that valuations do not matter for such businesses given the large moat that these companies had managed to create.
Don’t get me wrong; some of them were fabulously run. But we often forget the fact that during this time, the commodity price inflation was negative (Bloomberg commodity index and crude oil price both more than halved). Whatever price increase these companies took flew straight to the bottom line, thereby giving an illusion of a moat. With inflation now back, all these businesses are struggling to report superior growth in earnings.
Since then, their market capitalization has also not gone anywhere, but many investors still have faith in the face of markets doubling, and sectors that were considered bad businesses, and by extension, bad investments (metals, utilities, anti-ESG) have rallied.
In markets, many fund managers often reduce investing to bite-size sermons akin to what Ron did with “deliver the highest quality, you will have a great business”. It is easy for the listener to grasp, and many people relate to it (venture capital in the case of Ron Johnson, and HNI investors in the case of those fund managers).
Yes, delivering the highest quality is important, but that alone is not going to guarantee you will have a great business forever. If you are burning cash faster than you are generating it, you are dependent on continued external funding. If that dries up, so do your plans.
Similarly, just finding great companies is not going to guarantee you will have superior cross-cycle returns over the years. What you pay for such companies matters. Also, as I have previously written, markets operate in cycles, and there will be times when what we typically categorise as “bad businesses” will generate strong returns while the ‘great companies’ underperform.
Being aware that cycles exist in markets is the first step. We will likely have a much fuller investment experience if we can then formulate a strategy that can benefit from such market cycles rather than continually fight them.