Truth is, the final pre-IPO valuation of a company is merely a gamed number, arrived at after each funding round for equity is haggled over based on any number of guesses, hypotheses, salesmanship, and the terms of the last capital infusion.Īs far as Paytm is concerned, its founder and investors managed to build up the value of the company to $16 billion in 2019, and then to a $19 billion pre-IPO valuation, a few billion short of what they were gunning for. So why, you may ask, did India's food delivery company Zomato which, like Paytm, was never profitable, experience a mega-successful IPO four months before Paytm's listing? A quick analysis of the company would reveal Zomato's undisputed market dominance - galloping revenues as well as a globally benchmarked company and product that could give investors a realistic trajectory of where it could go. Here's the kicker - Paytm actually showed a drop in sales in 2021 but that didn't seem to bother most people. The S&P 500, for instance, currently trades at 1.4 times. It had a price-to-sales ratio of compared to 0.3-0.5 which is what global finch companies trade at according to Macquarie. It can also be misleading if you're dealing with a price-per-share that hinges on a pre-IPO valuation arrived at by the CEO, board, and backers who have all drunk from the same kool-aid tub and are also anxious to cash out big time.Įven there, Paytm was giving off bright red alerts. Then there is price-to-sales (P/S) which is perhaps the metric most often used in the tech firmament today. It's used for its impressively humongous numbers but is fundamentally useless since it rarely tells you anything meaningful about revenue and profits. One popular metric that is trotted out regularly to try and burnish an internet company's attractiveness is its gross merchandise value (GMV). And after all, it hinges on a company being able to post a positive net or operating income. Yet, it too suffers from high uncertainty, or multiple risks, when it comes to internet stocks since the future operating, regulatory, competitive, and other environments are too opaque for a nascent enterprise. Their bible, Security Analysis, advocated buying stocks by looking at a company's regular profits, low price-to-earnings (P/E), and debt.Ĭlearly, P/E is equally useless today as it was in the early 2000s since none of today's internet companies, with some exceptions, make any money.Ī much better tool is discounted cash flows - where you project future cash flows for five years and discount it back to today - and this has been popular in figuring out a public company's valuation. It was a world that had forgotten Graham and Dodd, Columbia business school professors, who in the 1930s essentially gave birth to both corporate finance and tools for value investing.
The crash was preceded by an orgy of such inventive and wildly implausible valuation metrics - eyeballs, clicks, eyeballs-per-clicks, page views, page hits - anything that could craft a self-serving analytical edifice that applauded the monumental froth that was going on. Be wary of puffed up valuationsĪnyone remember the dot com crash of 2001?Īnalysts were the chief stewards of the craze - stars like Mary Meeker and Henry Blodget became known as the queen and king of the internet bubble for their absurd valuation metrics. While you may not uncover huge losses stashed in offshore accounts ala Enron, you'll be far more educated and in control of your decision. The moral of this lesson? Do some basic, rigorous analysis of the company's fundamentals since analysts may not be doing it - after all, they may be wary of losing investment banking or underwriting business down the line.
0 kommentar(er)
