3 Reasons Why I‘m Not Investing in Rocket Internet

• „Rocket Internet flops on its IPO“
• „Rocket Internet disappoints“
• „Rocket Internet destroys the stock market“

These and many similar statements regarding the Rocket Internet (ETR:RKET) IPO were recently being tossed about by the media. However, this just shows how extremely short-term oriented stock market coverage is. Rocket isn’t a bad investment just because the stock price slipped below the IPO price a few hours after trading started.

Fellow Fool Miklos Szekely recently posted an optimistic view on Rocket’s long-term perspective, which you can find here.

I am way more defensive and not nearly as bullish. The following are the three main reasons why I’m not investing in Rocket’s stock:

1. Too many uncertainties in the valuation of the stock

Rocket Internet is a holding company. It has stakes in about 50 companies operating in more than 100 countries. Several of these companies are younger than my daughter who has just learned to speak her fifth word. So how can we value Rocket considering all of that?

The easist way would be to say that we trust the current investors in these 50 companies and accept their valuations. You can find these “last portfolio values” in the prospectus. If you now add Rocket’s other net assets after the IPO, you arrive at a value of 23.08 Euro per share (see page S-26 in the prospectus).

This is at least an indication of the value. But we don’t want to rely completely on others when making our investment decisions, do we? Hence, we’d have to value every single company in the conglomerate. I spare you how I would approach that, but the following would be the major factors:

• Estimated capital requirements
• Estimated probability of surviving
• Estimated potential total addressable market
• Estimated profit margin

That’s a lot of estimates, right? And we’d have to do this for every single company. To make it even more complex, Rocket is going to add companies every month or so. Coming up with realistic and reliable assumptions is a Herculean task. If one of you knows an easier way, I’m looking forward to comments below the article.

Actually, we could simplify the approach. We could say that it would be enough if at the end — say 10 years from now — Rocket will have hatched four-to-five real winners from whose profits they are profiting and all the other companies won’t have swallowed too much capital. If your conclusion is that this is a likely outcome, then I’d say a market capitalization of six billion Euros is justified.

I don’t want to dismiss this outcome out of hand — after all, Rocket owns companies in two of the four most populous countries in the world, India and Indonesia — but I don’t feel like I can realistically assess the probability at the moment. Since hope of high profits alone is not a reason for me to invest, I prefer to watch the events from the sidelines.

2. Opaque strategy

In short, Rocket wants to:

1. Sell its companies for a maximum profit as early as possible, or
2. be involved in them as long as possible to reap the benefits of the operating profits once they materialize.

I haven’t found a definite statement in the prospectus that says for sure which it will be going forward.

I tend to believe that Rocket is open to both, but I consider the former to be much more likely. Especially since the Samwer brothers have already had â€‹â€‹outstanding success with this approach. On the other hand, they have little experience with running a seasoned business.

Since I only invest in companies whose long-term earnings potential I believe I can estimate, my preference is for the second option. According to the prospectus, Rocket expects it’s companies to reach break-even six to nine years after founding them. Hence, even if they choose option number two, it’ll still be quite a long time before the profitable payoff.

3. The management team

To be sure, I do have respect for what the three Samwer brothers have built and achieved. They were not only at the right place at the right time, but they also showed the right instinct and acted on it. At the very least, this has worked out well for the brothers and the co-founders of their previous successfully-sold companies.

However, I cannot identify with their methods — which admittedly I only know only by hearsay (see the „Blitzkrieg E-Mail“ for example). Recently, their tone has been a little less aggressive, but I have my doubts that this is authentic. And the term “proven winners” — as Rocket calls the pearls in its portfolio — has a touch of pretension. After all, all of these companies still produce significant losses.

Sure, optimism is a prerequisite to successfully lead a company like Rocket Internet — and incidentally also to invest in the company. For external communication though, I would like to see more appropriate word choices. The approach of Rocket’s management to date causes me to doubt whether management is candid with its investors. And sincerity of management is a core criterion for me to invest in a company.

Another issue that backs my impressions: Since early August, Rocket has landed three investors who have successively increased Rocket’s valuation. This move — we’re talking about a space of not even two months between the new investors and the IPO — makes me a bit queasy.

Conclusion

The German media has talked unfavorably about Rocket primarily because the company, or the banks involved, have not tried to stabilize the share price in the hours after the start of trading. For Foolish investors though, this is of little importance, and we should ignore such discussions.

For us, it is important if Rocket offers us the opportunity to pay 50 cents for one Euro of value. Unfortunately, my short answer to that is: Though I don’t think it’s unrealistic, I think it’s extremely difficult to realistically estimate that kind of an outcome. In addition, there are some strategy and the management practices that don’t sit well with me.

Do you disagree with me? Share your thoughts in the comments section below. I consider the opportunity of Rocket Internet very interesting and wouldn’t mind if someone was able to change my mind!