Tech company Evernote has an unenviable reputation. In 2015 the company was labeled the “first dead unicorn” as growth slowed and users turned away from the product. Luckily for the company’s employees and users, however, CEO Chris O’Neill who was brought in after the founder left two years ago, has placed the company back on track for growth.
Evernote isn’t the only so-called unicorn that’s fallen from grace since 2015. The most high profile failure since is the busted IPO of Blue Apron, which has lost more than two-thirds of its market value since IPOing at the end of June.
Dead unicorn s and busted tech firms are hardly traditional value investments, but they’ve recently drawn the attention of renowned value investor Seth Klarman.
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The Dead Unicorn Trade
Klarman's hedge fund Baupost has traditionally eschewed high-growth tech stocks, in favor of more traditional value investments, but now the firm could venture into the sector as it seeks "the new firms that are seeking to displace the older incumbents." Klarman reportedly says in the letter that "Disruptive change is already driving differences in the assumptions we are comfortable making and the cash flow projections that underpin our financial models."
A dead unicorn may fit the bill perfectly. Cash-rich Baupost is well positioned to step in on preferential terms for these promising companies that run out of cash in the highly illiquid private market. It seems Klarman sees more value in this approach than buying public tech groups. The WSJ reports that in his letter he says leading tech groups such as Amazon and Facebook are "not necessarily great investments going forward" as "many of these companies seem very fully valued."
Baupost is also finding value in some firms that are being attacked by Amazon. He cities department stores as an example saying, "even for Macy’s, the correct price today is not zero." He goes on "Macy’s owns valuable real-estate assets, and there may be ways to navigate through the current environment while salvaging some value for shareholders."
Does this mean Baupost is buying distressed retailers?