The only thing in this world going in the right direction right now is the stock market.
There’s a reason for that. Most of it is out of sight. (ChatGPT drew this for me.)
Private equity dominates the public market, and private equity is opaque. Anything can be worth anything in private equity and there’s no way for the public to prove different.
OpenAI is just one example. Private equity has been frantically trying to cauterize it for months, hiding its coming failure while quietly looking for the exits.
What’s it worth? What would you pay for a share of it, right now? Nvidia is getting out. Softbank is walking away. I’ve said this before, but failure happens very slowly, then all at once.
OpenAI is the tip of a very large iceberg. Even things that work, and are closely attached to public companies, are hiding losses in plain sight. Om Malik, who knows more than I’ve forgotten, got it right recently in writing about Waymo.
Waymo just raised $16 billion, giving itself a value of $160 billion. Om then goes through the math on Waymo. The numbers don’t work. Waymo has 2,500 cars, each of them doing 25 trips per day, 15 minutes per trip, and charging $18 per ride. That’s about $400 million coming in. The cars cost $175,000 each, so with 2,500 of them that’s $437 million in car costs.
Maybe you can cut those car costs. Maybe you can increase revenues by driving down freeways (although the resulting prices are a rip-off, says Om). What about the mapping, operations centers, remote support staff, and the regulatory apparatus needed to run the fleet?
Will you pay $16 billion for 10% of a company losing money on $400 million of revenue? I wouldn’t.
MuskWorld
Remember, Google controls Waymo. This is a transparent, successful, public company. Their “other bets,” mostly Waymo, lost $3.6 billion in the last quarter alone. Google isn’t hiding anything. Thanks to “optimistic” accounting, however, co-founders Larry Page and Sergey Brin are each worth $250 billion.
What can you do without that kind of transparency?
Elon Musk just combined SpaceX, which includes Starlink, with xAI, which includes the site formerly known as Twitter. He claims the whole thing is worth $1.25 trillion. Based on his stake in SpaceX, he now claims to be worth $850 billion, on his way to $1 trillion.
But is he?
SpaceX is where the profit is. The company brought in $16 billion last year, half of it from Starlink, and claimed $8 billion of that as profit. But that profit is the dreaded EBITDA, Earnings Before Income Taxes, Depreciation, and Amortization. That’s not net income. Musk says SpaceX is worth 62 times its revenue, based on plans to use EchoStar spectrum that will let mobile phones use Starlink without a terminal.
These numbers are not audited. Are they real, or did he pull them out of his backside?
SpaceX is also wholly dependent on government for its existence, and given Musk’s other craziness that’s no small risk. It needs licenses and it needs contracts. How much of that valuation is built on a real business, how much on Musk alone?
Also, is the money-losing xAI worth $250 billion? Is Tesla worth $1.3 trillion, on $94 billion of revenue and less than $4 billion of net income? The market says so. But is it right?
The Fear
There are dozens of such deals funded by private equity. You don’t know what they’re worth. I don’t. Even the people who are investing don’t know.
This is on top of all the “circle jerk” financing going on among Nvidia and its Cloud Czar partners, companies “investing” in each other using chips and compute rather than cash.
How many rich dudes are using the stock they own in successful companies like Microsoft and Apple to backstop loans that they’re putting into companies like SpaceX and Waymo? How many of the proceeds from those loans are going into Bitcoin, down 23% so far this year? What happens when banks call those loans?
Market cap is a dicey way to value yourself, your company, or your economy. It’s based on confidence, the number of shares multiplied by the last price paid for each share. If someone sells at a lower price, it all falls.
If Larry Page decided to dump his Google shares tomorrow there’s no way he’d get $250 billion in cash out. But what about private equity? They’re playing these valuation games without the public as a backstop, assuming someone will back them up.
Maybe someone will. Maybe you will, as in the government will. That’s what happened back in 2008, as Lehman Brothers collapsed. The incoming President was told that unless he accepted $1 trillion of bailouts to the banking system, new money produced out of thin air, the economy would collapse. They put the economic gun to Barack Obama’s head, and he took the deal.
