almost 3 years ago • 3 mins
What does this mean?
American media companies ViacomCBS and Discovery saw their stock prices plummet 27% on Friday, marking their worst days ever. Chinese internet stocks such as Baidu, Vipshop, and Tencent Music tanked too, albeit a bit less dramatically. Such large share-price moves at such large public companies mean there has to be hefty selling going on somewhere – and when it emerged that those chunky trades originated from a single seller, other investors began to freak out. Concerned that Archegos knew something they didn't, they started preemptively selling shares of other companies too. But they needn’t have worried: it was just another case of one investor’s big bets gone horribly wrong…
Why should I care?
The bigger picture: Be careful when betting with other people’s money.
Archegos had borrowed heavily from various banks to invest – and that’s not for the fainthearted. Such leverage artificially increases the size of your bets: any gains will be bigger, but losses are supersized too. And if investments made on leverage start to falter, watchful lenders will demand extra deposits. Failure to respond fast enough leads to forced selling of those investments in an attempt to limit the lenders’ losses – which is why $20 billion worth of shares got dumped on Friday.
For markets: Business as usual.
The fire sale might’ve been unsettlingly unprecedented in size, but its repercussions should be relatively contained. Besides Archegos, the only big losers appear to be the banks that lent it money – most notably Nomura and Credit Suisse. US and Chinese stock markets barely blinked on Monday, and the specific shares involved largely remain above where they were at the start of the year.
Keep reading for our next story...
What does this mean?
Everything’s happening online nowadays – including car sales. Cazoo aims to provide a premium preowned purchasing experience: it buys up old cars, reconditions them, and then sells them on through its website. There’s doorstep delivery, and if you’re not satisfied then the company – unlike your standard sawdust-in-the-gearbox seller – simply picks the car back up. The approach seems to be catching on: Cazoo expects its sales to grow 300% this year.
Something similar's happening to the company’s valuation, too. Cazoo’s agreement to merge with the Ajax I SPAC – an already-listed “blank-check” company whose sole aim is to merge with another firm – values the used car business at $7 billion: a nice bump from $2.6 billion at its last funding round in only October.
Why should I care?
For markets: Europe is more profitable, for a change.
Cazoo’s US contemporary Carvana would probably prove stiff competition: its share price has increased fourfold in the past year, giving it a market value of just under $45 billion. But Cazoo reckons the European market is much more attractive than America anyway, with a higher population density setting it up for greater profitability. Eventually, that is: the company doesn’t expect to actually make any money until 2024.
The bigger picture: SPAC, USA, OMG.
Europe’s $1 billion worth of SPAC listings over the past year is peanuts compared to the US’s $300 billion. That could be down to more favorable stock exchange rules – but Europe’s startups also tend to be twice the age of US equivalents when they make their stock market debuts. By that stage they’re often more profitable and likely less interested in handing over an up to 20% ownership stake to the SPAC’s sponsor.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.