Eighteen months ago, online used car retailer Carvana had such a big future that it was worth $80 billion. The company’s valuation has now fallen 98% to less than $1.5 billion, and it is struggling to survive.
Many other technology companies have also seen their fortunes reversed and their dreams darkened. Despite the large economy performing well with a decline in the unemployment rate in the third quarter and an annualized growth rate of 3.2 percent, companies are shedding employees, making layoffs, and financial ratings are declining. We are seeing it decline.
One little-known explanation is that the era of unprecedented low interest rates ended abruptly. Money is no longer effectively free.
For more than a decade, profit-seeking investors have been pumping money into Silicon Valley, funneling it into a variety of startups that might not have been approved in its less-than-stellar days. Extreme valuations make it easier to expand aggressively by issuing stock or taking loans, and to offer sweet deals to potential customers, rapidly increasing market share. did.
It was a boom that seemed to have no end. Technology companies won and their competitors declined. Carvana built dozens of flashy car “vending machines” across the country, relentlessly marketing itself and offering very attractive trade-in prices.
“The entire tech industry over the last 15 years has been built on cheap money,” said Sam Abuelsamid, principal analyst at Guidehouse Insights. “Now they are facing a new reality, and they will pay the price.”
Many of the acquisitions that replaced organic growth in the technology industry were financed on the cheap. Two years ago, as the pandemic raged and many office workers were confined to their homes, Salesforce acquired office communications tool Slack for $28 billion, a price some analysts said was too high. I was thinking. Salesforce borrowed his $10 billion to make this deal. The company announced this month that it was cutting 8,000 jobs, or about 10% of its staff, with many working in Slack.
Even the biggest technology companies are being affected. Amazon was willing to take losses for years to acquire new customers. The company has recently taken a different approach, laying off 18,000 employees and closing uneconomic operations.
Like many startups, Carvana took a page from Amazon’s old playbook and tried to get big quickly. The company believed that used cars, like taxis, bookstores and hotels, were a highly fragmented market ripe for reinvention. We strived to outperform all our competitors.
The Tempe, Ariz.-based company wants to replace traditional dealerships with “technology and exceptional customer service,” Carvana boasted. As if to symbolize the end of the old ways, a Mazda dealer paid $22 million for a six-acre property in San Diego that it had occupied since 1965.
Where traditional dealerships were literally flat, Carvana built a towering car vending machine that would become a memorable local landmark. Customers pick up their cars at these towers, and there are currently 33 towers in total. His corporate video about building one vending machine has been viewed over 4 million times on YouTube.
In the third quarter of 2021, Carvana delivered 110,000 cars to customers, an increase of 74% compared to 2020. The goal is to sell 2 million cars a year, which would make the company by far the largest used car retailer.
Then the company collapsed faster than it grew. That created supply issues when used car sales rose more than 25% for him in the first year of the pandemic. Carvana needed more vehicles. It bought a car auction company for $2.2 billion and took on even more debt at higher interest rates. The company then paid the customer a significant amount for the car.
But once the pandemic subsided and interest rates began to rise, sales slowed. Carvana, which declined to comment for this article, made a series of layoffs in May and again in November. The company’s chief executive, Ernie Garcia, blamed rising financing costs and said: “We couldn’t predict exactly how all this was going to play out.”
Some competitors are even worse off. Houston-based Bloom’s stock has fallen to $1 from $65 in mid-2020. The company has laid off half of its employees in the past year.
“High interest rates are painful for just about everyone, but they’re especially painful for Silicon Valley,” said Chiron Hsiao, an associate professor of finance at Columbia Business School. “Unless the Fed reverses tightening, we expect further layoffs and investment cuts.”
That is highly unlikely at this point. Markets expect the US Federal Reserve to raise interest rates to at least 5% two more times this year.
In the real estate industry, this is a problem for those hoping for a quick recovery. Low interest rates not only pushed up home prices, but also made it attractive for companies like Zillow, Redfin, and Opendoor Technologies to get into the previously considered somewhat unpopular business of flipping homes. .
In 2019, Zillow estimated that selling 5,000 homes a month could soon generate $20 billion in revenue. That excited investors, pushed the Seattle-listed company’s valuation to $45 billion, and sparked a hiring boom that saw the number of employees grow to 8,000.
Zillow’s concept was to use artificial intelligence software to make the chaotic real estate market more efficient, predictable, and profitable. This was the kind of innovation that venture capitalist Marc Andreessen said in his 2011 article that digital rebels would take over entire industries. “Software is eating the world,” he wrote.
In June 2021, Zillow had 50 homes in California’s capital city of Sacramento. Five months later he had 400 homes. One of his homes was a modest four-bedroom, three-bathroom house in the northwest corner of the city. Built in 2001, it has convenient access to several parks and the airport. Zillow paid $700,000 for it.
Zillow had the house on the market for several months, but no one wanted it, even at $625,000. Last fall, Zillow unloaded the house for $355,000 after it was randomly taken off the inversion market. With interest rates low, it seemed like Zillow might be able to shoot for the moon, but it still hasn’t been able to pull it off.
Ryan Lundquist, a Sacramento appraiser who closely tracks housing history on his blog, said Zillow recognized that real estate was fragmented, but that housing was labor-intensive and highly said, probably didn’t quite understand that it was a personal, one-on-one deal.
“This idea that you can come in and completely change the game, it’s very difficult to do, and most of the time it’s not,” he said.
After two rounds of layoffs, Zillow’s market value has now shrunk to $10 billion and the company has about 5,500 employees. He declined to comment.
However, the dream of market domination through software persists. Zillow recently signed a deal with Opendoor, a San Francisco-based online real estate company that buys and sells residential real estate, but has also been hit by the recession. Under the agreement, sellers on Zillow’s platform can request that Opendoor make an offer on their home. Zillow said sellers can “avoid the stress and uncertainty of the traditional sales process.”
This partnership may explain why the buyer of the last one in Zillow’s portfolio, a four-bedroom home in Sacramento, was none other than Opendoor. With some modest improvements, the house was put on the market for $632,000, almost double what they paid for it. Transaction is pending.
“If it were really this easy, everyone would be flippers,” Lundquist says.
The era of easy money was well established when Amazon decided it had mastered e-commerce enough to compete with the physical world. Plans to expand into bookstores have been rumored for years and finally materialized in 2015. The media went crazy. According to one popular story, the retailer had plans to open as many as 400 bookstores.
The company’s idea was that its stores would act as an extension of its online operations. Reader reviews serve as a guide for potential buyers. There were only 6,000 because the titles were displayed face-up. The store was an Amazon electronics showroom.
Becoming an internet showroom is expensive. Amazon needed to hire booksellers and rent stores in popular areas. And having glowing reviews as one of our selection criteria meant stocking up on self-published titles, some of which were buoyed by reviews by friends of the authors. These were not the books readers wanted.
Amazon likes trying new things, but it costs money. In the first nine months of this year, the company took on an additional $10 billion in long-term debt at higher interest rates than it was paying two years ago. This month, the company announced it was borrowing an additional $8 billion. The company’s stock market valuation fell by about $1 trillion.
Last March, the company closed 68 stores, including not only bookstores but also pop-up stores and so-called four-star stores. It continues to operate its grocery subsidiary Whole Foods, which has 500 stores in the United States, and other food stores. Amazon said in a statement that it is “committed to building great physical retail experiences and technology for the long term.”
Traditional bookselling, with its modest expectations, may now have an easier path. Barnes & Noble, the recently almost defunct brick-and-mortar chain, moved into two former Amazon stores in Massachusetts, each stocking about 20,000 titles. The chain said its stores were performing “very well.” Other Amazon locations are also being scouted.
“Amazon has run a very different bookstore than we do,” said Janine Flanigan, Barnes & Noble’s director of store planning and design. “Our focus is books.”
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