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Not sure what the lesson is here, other than "shares sometimes drop in value". I think most people understand that shares in tech startup IPOs are a fairly hig

by jiggy2011 14y ago

Not sure what the lesson is here, other than "shares sometimes drop in value". I think most people understand that shares in tech startup IPOs are a fairly high risk business.

veyron 14y ago
"I think most people understand that shares in tech startup IPOs are a fairly high risk business." That's not clear ... Forget about the multitude of analysts who were way off the mark (Lou Kerner, for example, called for $200B Facebook) for a moment. Representative Fattah, congressman from PA, did an interview with CNBC and clearly didn't recognize the risks of Facebook. http://video.cnbc.com/gallery/?video=3000090703&play=1 http://video.cnbc.com/gallery/?video=3000090703&play=1
grey-area 14y ago
The intended lesson is restated at the end, in case you missed it: Or we could...start valuing stocks based on fundamentals. Valuing stocks on putative future profits based on users, or on comparative values based on other inflated stocks, or based on the price someone paid for some fraction of their shares last week, is not really a solid way to try to calculate value for investors. It's a difficult problem and no-one can claim to have a definitive solution, but the methods used to value Instagram, FaceBook, Groupon, etc do not stand up to a lot of scrutiny. Of course you could argue that it's too soon after an IPO to judge the possible profits of FaceBook (for example) and the right price for them, but given the current valuation of FaceBook ($44B?) and their current revenue and profits vs users, I'd say they have farther to fall, esp. when employees start to sell shares soon.
- jiggy2011 14y ago
  I guess with some of these startups though the ground is so untrodden that's it would be impossible to come up with a way to value them other thinking about things like future monetisation of users. Without it's users, Facebook is worth very close to $0. With it's users? who knows?
  - grey-area 14y ago
    Without it's users, Facebook is worth very close to $0. With it's users? who knows? Well, one way to look at that question is to ask how much revenue they make per user (ARPU) and how much profit right now, and how much they could scale that. Obviously these numbers can be manipulated, and are likely to be optimistic if anything, but it's a better starting point than trying to work out numbers based on what someone paid for 10% of shares, or what someone paid for Instagram, or what they would make if they managed to charge their users a subscription (unlikely in the extreme). Given their business model (ad supported), the fickle nature of their users, and their strong free competitors (Google, Twitter etc), I personally don't think they are worth $44 per user (assuming 1B users). I think the ARPU is around $1, that's not great, and not likely to grow hugely.
- drumdance 14y ago
  Who is "we?" The market can stay irrational for longer than you can stay solvent.
  - grey-area 14y ago
    The we could... quote was from the article and refers to the dear readers without presuming to know what they think - it's an exhortation. Stock markets behave mostly irrationally in the short term (see Random Walk Down Wall Street), but that doesn't mean you shouldn't attempt to ignore the irrationality and get a little closer to the objective truth - in this case by valuing companies based on what they earn and could earn, not what someone else paid for them or might pay for them. Depends what you're after I guess - if you are trying to make lots of money in a few days/weeks/years with borrowed money, you'd absolutely have to attempt to predict the irrationality of the market or go bust. On a long time scale with money which is not borrowed/required, you can afford to take a longer view based on profits.

Not sure what the lesson is here, other than "shares sometimes drop in value". I think most people understand that shares in tech startup IPOs are a fairly high risk business.

veyron 14y ago

"I think most people understand that shares in tech startup IPOs are a fairly high risk business." That's not clear ... Forget about the multitude of analysts who were way off the mark (Lou Kerner, for example, called for $200B Facebook) for a moment. Representative Fattah, congressman from PA, did an interview with CNBC and clearly didn't recognize the risks of Facebook. http://video.cnbc.com/gallery/?video=3000090703&play=1 http://video.cnbc.com/gallery/?video=3000090703&play=1

grey-area 14y ago

The intended lesson is restated at the end, in case you missed it: Or we could...start valuing stocks based on fundamentals. Valuing stocks on putative future profits based on users, or on comparative values based on other inflated stocks, or based on the price someone paid for some fraction of their shares last week, is not really a solid way to try to calculate value for investors. It's a difficult problem and no-one can claim to have a definitive solution, but the methods used to value Instagram, FaceBook, Groupon, etc do not stand up to a lot of scrutiny. Of course you could argue that it's too soon after an IPO to judge the possible profits of FaceBook (for example) and the right price for them, but given the current valuation of FaceBook ($44B?) and their current revenue and profits vs users, I'd say they have farther to fall, esp. when employees start to sell shares soon.

jiggy2011 14y ago
I guess with some of these startups though the ground is so untrodden that's it would be impossible to come up with a way to value them other thinking about things like future monetisation of users. Without it's users, Facebook is worth very close to $0. With it's users? who knows?
- grey-area 14y ago
  Without it's users, Facebook is worth very close to $0. With it's users? who knows? Well, one way to look at that question is to ask how much revenue they make per user (ARPU) and how much profit right now, and how much they could scale that. Obviously these numbers can be manipulated, and are likely to be optimistic if anything, but it's a better starting point than trying to work out numbers based on what someone paid for 10% of shares, or what someone paid for Instagram, or what they would make if they managed to charge their users a subscription (unlikely in the extreme). Given their business model (ad supported), the fickle nature of their users, and their strong free competitors (Google, Twitter etc), I personally don't think they are worth $44 per user (assuming 1B users). I think the ARPU is around $1, that's not great, and not likely to grow hugely.
drumdance 14y ago
Who is "we?" The market can stay irrational for longer than you can stay solvent.
- grey-area 14y ago
  The we could... quote was from the article and refers to the dear readers without presuming to know what they think - it's an exhortation. Stock markets behave mostly irrationally in the short term (see Random Walk Down Wall Street), but that doesn't mean you shouldn't attempt to ignore the irrationality and get a little closer to the objective truth - in this case by valuing companies based on what they earn and could earn, not what someone else paid for them or might pay for them. Depends what you're after I guess - if you are trying to make lots of money in a few days/weeks/years with borrowed money, you'd absolutely have to attempt to predict the irrationality of the market or go bust. On a long time scale with money which is not borrowed/required, you can afford to take a longer view based on profits.