Trees

“Unicorns” are now appearing at an average of one per week…

Inc. magazine reports the number of unicorns—startup companies valued at over $1 billion—is now 124. That’s up from 80 in March.

The chart below shows the rapid rise in startup unicorns. In 2009, only four companies held the title. But in six short years, we’ve seen a 3,000% rise.

The combined valuation of all 124 companies is now $468 billion (an almost 3,500% increase in value since 2009).

Chart

  The news won’t surprise regular Daily readers. They know the rise in unicorns reflects years of a loose Federal Reserve monetary policy. It’s unsustainable.

And it’s already starting to unravel…

Here’s what Tom wrote about the craze in the June issue of Tom’s Confidential

The most alarming sign comes from Peter Thiel, co-founder of PayPal and early investor in Facebook. He said, “the bigger the markup on the last round, the more undervalued the company is.”

Tom Dyson

Thiel thinks the bidding war is a sign of companies being undervalued. But the logic is backward. Paying twice the price means taking twice the risk. Paying $10 per share is taking twice the risk as paying $5. Thiel doesn’t think so.

This thinking is what leads to bubbles.

Alan Patricof, founder of Greycroft Partners, has a more reasonable perspective…

He says: “[People are buying] traffic growth and revenue growth… At some point, all of these companies will be valued on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). If the IPO market goes away, or, for any reason, there’s a blip in the outlook, people could be left holding a lot of inventory they’d wish they didn’t have.”

Patricof is saying investors and founders are playing the “greater fool theory.” They think someone else must be a “greater fool” to continue to invest in these companies at such levels.

When the music stops—which it will—these companies will go bankrupt. They don’t have the profits to warrant these absurd valuations.

Tom recommended his TC subscribers buy put options on some of the largest Silicon Valley media darlings. The companies all sport the types of absurd valuations described above.

Within 60 days, TC subscribers closed their trade on Yelp for a 221% gain. Four other put recommendations are showing double- and triple-digit gains (113.4%).

One put option position is still actionable for new money. All Tom’s Confidential subscribers can review the trade details right here.