4 ms·

While I agree with you, I wouldn't be terribly unhappy if IPOs changed in the future. I'm actually quite worried that, as you say, people are looking at a comp

While I agree with you, I wouldn't be terribly unhappy if IPOs changed in the future. I'm actually quite worried that, as you say, people are looking at a company that is nearly 3x its IPO a year later and calling a flop. But I'm even more worried that a company with a value of $1 billion (after a $100 million series D) 2 years before IPO can have a market cap of ~$10 billion one year after an IPO -- and it's still seen as a failure by somebody. Because that's a bloody miracle. I'm not just worried about that, though. If we accept these numbers (which I mostly got from Bloomberg and Wikipedia), we're saying that a $100 million infusion of cash propelled the company to $10 billion market cap in only 3 years. And looking at the balance sheet: $330 million revenue in 2019. Net income $7.58 million. Total assets: $355 million. Total liabilities: $202 million. Annual operating expenses: $51 million. So I'm seeing a company with a $10 billion market cap, with earnings of $7 million a year, and about 2 years worth of operating expenses in assets after liabilities are taken into consideration. So I'm wondering what fueled that 10x increase in 3 years. Because on paper I don't think I'd be touching it with a 10 foot pole at it's price. It seems like only its promise to be the next Google or Amazon is what's keeping the price high. So that's what worries me about IPOs. People are expecting massive multipliers and even when they get them, some people are upset. But these massive IPOs also seem to be super fragile (at least in principal -- I have no idea if Zoom will be the next big thing or not). It doesn't seem like they are doing anything near the business necessary to justify their market positions. So I worry that someday the emperor will notice he has no clothes...

shrimpx 7y ago
I never understand this line of reasoning. It amounts to lamenting that the market is not predictable (accurately reflecting “real value”). If market positions were merely a function of “how the business is doing” then who needs a market? My point is a market has a huge amount of speculation in it.
- mikekchar 7y ago
  That's not really what I'm saying. I'm saying that there is too much speculation. The bets are too big. I don't care one lick if people lose their shirts. The problem is that if we put a lot of money into ventures that have a very low probability of success, then that money is not at all efficient. The idea that you have to bet big to win big could very well guide us into recession (or worse). It wouldn't be the first time it has happened ;-)
  - pas 7y ago
    How much is too much? There are many regulations protecting people from investing accidentally too much. What's wrong with people with billions putting it wherever they thing might potentially make some more?
    - mikekchar 7y ago
      Too much is when a stock market crash causes a depression ;-). Money can literally disappear. Especially when large investors are pension funds and insurance companies, there could be pretty massive damage if the stockmarket loses a significant portion of its value due to unrealistic expectations and extremely high risk speculation. Like I said, I don't care if an individual investor loses their shirt. I'm worried about the trend for the market as a whole to consider an IPO like zoom to be on the low end of their expectations.
      - pas 7y ago
        The market is full of large institutional investors. If they all collectively buy in on the madness, maybe, just maybe people shouldn't put their pensions into the hands of these very professional investors, huh? :) That said, worrying about how too much money will ruin the stock market is like worrying about how too much proportionality will ruin democracy.
    - jfengel 7y ago
      "Too much" is that there's literally only so much value out there to buy. Publicly listed companies will earn $X over the next year or ten years. Buying a stock buys you a piece of that. If so much money flows in that your share of $X is worth less than some other investment, you're making a bad choice. The flood of money implies that you can get rich by selling your piece of $X to somebody else, but that's not real money. It's just a pyramid scheme that will collapse. There's always genuine uncertainty in the value of $X and even more uncertainty about how it will be distributed, so there's room for real speculation. But "too much" is reached where even a broad index fund would perform poorly because the price is bid up by speculation rather than investment.
Lazare 7y ago
I don't necessarily disagree with your argument. Zoom is trading at PE ratio of like...1.4k, Logmein trades at a PE ration of 20. Is Zoom just a thousand times more likely to grow to dominate the sector? I mean, it wouldn't surprise me (I've hated every interaction I've ever had with Logmein-created software), but a PE ratio over 1000 is still kinda nuts. That being said: This has nothing to do with IPOs. Zoom IPOed at a much more reasonable price, and the public market (rightly or wrongly) has decided Zoom has a great future. This is all well past the IPO process, has nothing to do with investment banks or greenshoes or the first day bounce or any of that. So while yes, you can poke around public markets and find things that look mispriced, that's just a thing that happens (and has always happened) in public markets. (Also, history suggests it's a lot harder to correctly identify bubbles than you'd think...) In other words, I don't think your wrong, but I'm not sure there's anything systemic here. Saudi Arabia has a lot of money, they want to invest it, they're not super good at finding investment opportunities, so they've managed to throw some of it away on dumb things like robotic pizza trucks, or buying Adam Neumann a lot of houses. That's bad (for the investors), and weird (for all of us watching from the sidelines), but I don't know that it means much.

shrimpx 7y ago

I never understand this line of reasoning. It amounts to lamenting that the market is not predictable (accurately reflecting “real value”). If market positions were merely a function of “how the business is doing” then who needs a market? My point is a market has a huge amount of speculation in it.

mikekchar 7y ago
That's not really what I'm saying. I'm saying that there is too much speculation. The bets are too big. I don't care one lick if people lose their shirts. The problem is that if we put a lot of money into ventures that have a very low probability of success, then that money is not at all efficient. The idea that you have to bet big to win big could very well guide us into recession (or worse). It wouldn't be the first time it has happened ;-)
- pas 7y ago
  How much is too much? There are many regulations protecting people from investing accidentally too much. What's wrong with people with billions putting it wherever they thing might potentially make some more?
  - mikekchar 7y ago
    Too much is when a stock market crash causes a depression ;-). Money can literally disappear. Especially when large investors are pension funds and insurance companies, there could be pretty massive damage if the stockmarket loses a significant portion of its value due to unrealistic expectations and extremely high risk speculation. Like I said, I don't care if an individual investor loses their shirt. I'm worried about the trend for the market as a whole to consider an IPO like zoom to be on the low end of their expectations.
    - pas 7y ago
      The market is full of large institutional investors. If they all collectively buy in on the madness, maybe, just maybe people shouldn't put their pensions into the hands of these very professional investors, huh? :) That said, worrying about how too much money will ruin the stock market is like worrying about how too much proportionality will ruin democracy.
  - jfengel 7y ago
    "Too much" is that there's literally only so much value out there to buy. Publicly listed companies will earn $X over the next year or ten years. Buying a stock buys you a piece of that. If so much money flows in that your share of $X is worth less than some other investment, you're making a bad choice. The flood of money implies that you can get rich by selling your piece of $X to somebody else, but that's not real money. It's just a pyramid scheme that will collapse. There's always genuine uncertainty in the value of $X and even more uncertainty about how it will be distributed, so there's room for real speculation. But "too much" is reached where even a broad index fund would perform poorly because the price is bid up by speculation rather than investment.

Lazare 7y ago

I don't necessarily disagree with your argument. Zoom is trading at PE ratio of like...1.4k, Logmein trades at a PE ration of 20. Is Zoom just a thousand times more likely to grow to dominate the sector? I mean, it wouldn't surprise me (I've hated every interaction I've ever had with Logmein-created software), but a PE ratio over 1000 is still kinda nuts. That being said: This has nothing to do with IPOs. Zoom IPOed at a much more reasonable price, and the public market (rightly or wrongly) has decided Zoom has a great future. This is all well past the IPO process, has nothing to do with investment banks or greenshoes or the first day bounce or any of that. So while yes, you can poke around public markets and find things that look mispriced, that's just a thing that happens (and has always happened) in public markets. (Also, history suggests it's a lot harder to correctly identify bubbles than you'd think...) In other words, I don't think your wrong, but I'm not sure there's anything systemic here. Saudi Arabia has a lot of money, they want to invest it, they're not super good at finding investment opportunities, so they've managed to throw some of it away on dumb things like robotic pizza trucks, or buying Adam Neumann a lot of houses. That's bad (for the investors), and weird (for all of us watching from the sidelines), but I don't know that it means much.