Kris, this is why I love reading your posts. You have ABSOLUTELY NAILED IT with this one. Right on, brother.
Unicorns beware: markets get it wrong on tech valuations
Financial Times By Tom Braithwaite
1 hour ago
Public markets are plagued with stupid short-termist, short-sighted, short-tempered, short-selling public investors. It is an old moan fashioned into a new lament by unicorns, the private technology companies with a market value of more than $1bn.
It is also a caricature. Yes, US share buybacks and dividends are set to surpass a record $1tn this year and it is a tech company, Apple, goaded by an activist investor, which is leading that charge.
But there is not mutual disaffection between Wall Street and Silicon Valley so much as scorn flowing from west to east. Public market investors can be remarkably patient if spun a bold enough yarn and given a bit of evidence.
Take Amazon, Tesla and Netflix, three pillars of the new economy, which between them are valued at almost $390bn.
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Amazon went public in 1997, then worth $438m. It now has a market cap of $315bn. A brutally short-termist market would require that such exponential growth be underpinned by a steady stream of cash return. Amazon has barely dipped its toe into share buybacks and never paid a cent in dividends. But surely it has a history of strong profits, at least? General Electric, whose market cap Amazon recently overtook for the first time, earned $15bn last year. Amazon has earned a cumulative $2bn in the last 20 years; its price/earnings ratio has risen to almost 1000. Then it must have consistently met analysts' expectations? It has fallen short in 13 of the last 20 quarters. And yet over that period the stock has risen 300 per cent.
What Amazon has offered is growth and a good story. Shifting the narrative in new ways even helps - online book store to the "everything store"; US to international; retail to cloud computing. Eric Dillon, an early investor in Amazon, described his first encounter with founder and chief executive Jeff Bezos: "He swept me off my feet. He was so convinced that what he was doing was basically the work of God and that somehow the money would materialise." Twenty years later, it is still that promise of future cashflows that keeps investors bidding up the stock.
Netflix has also benefited from a recent rerating, not forged on returns as much as the promise of them. Mark Mahaney, internet analyst at RBC, uses the video streaming company to attack the notion that "the public markets suck and they're so short-term oriented". He points to the company generating more enthusiasm and a multiple upgrade when it painted a grander vision of international growth. "Investors will do that for stories that have some proof behind them. The public markets are certainly willing to take long-term views on stocks but you have to prove it."
Third, Tesla. In some ways Elon Musk's company is an even more powerful rebuttal to the short-termist thesis. Amazon and Netflix may have been given space to grow but they also have not tested that patience by frequently passing around the hat for more cash. After its initial public offering in 2010, the electric car maker sold $175m of equity in 2011, $225m in 2012, $360m in 2013, took a year off, and then sold another $750m in August this year, diluting its shareholders each time. The future is not cheap but public investors are more than willing to cough up for a piece of it.
Treat them more kindly and they do not always respond well. IBM has adhered to the supposed Wall Street orthodoxy of cutting costs, leveraging up and paying big buybacks and for a while the stock outperformed. But recently the outperformance ended. The complaint of Stanley Druckenmiller, the hedge fund investor who took a big short position, was not that there was insufficient financial engineering but that the company had not invested for growth.
The wary private tech companies are probably more focused on the poor record of their brethren who have chosen to go public more recently. Square, the payments company, is set to take the plunge in the next few days with an indicative range that suggests it could price below its last private fundraising. Box, the cloud storage company, did the same thing in January and has since fallen further. Etsy, OnDeck, Lending Club and GoPro have all gone public in the last 12 months and are all trading below their IPO price.
Some of these might be being under-valued by the market. Equally, five of the top 10 companies in the S&P 500 are now tech stocks; some of those may be over-hyped. Public markets get it wrong, but they do not always demand instant gratification. tom.braithwaite@ft.com
Copyright © 2015 The Financial Times Limited. Please don't cut and paste FT.com articles and redistribute by email or post to the web.
Unicorns beware: markets get it wrong on tech valuations
Financial Times By Tom Braithwaite
1 hour ago
Public markets are plagued with stupid short-termist, short-sighted, short-tempered, short-selling public investors. It is an old moan fashioned into a new lament by unicorns, the private technology companies with a market value of more than $1bn.
It is also a caricature. Yes, US share buybacks and dividends are set to surpass a record $1tn this year and it is a tech company, Apple, goaded by an activist investor, which is leading that charge.
But there is not mutual disaffection between Wall Street and Silicon Valley so much as scorn flowing from west to east. Public market investors can be remarkably patient if spun a bold enough yarn and given a bit of evidence.
Take Amazon, Tesla and Netflix, three pillars of the new economy, which between them are valued at almost $390bn.
More from the Financial Times
White Star Capital launches $70m start-up fund
Technology: Unicorns face end of the 'steroid era'
Risks and rewards of tech's Next Big Thing
The start-ups turning healthcare on its head
Amazon went public in 1997, then worth $438m. It now has a market cap of $315bn. A brutally short-termist market would require that such exponential growth be underpinned by a steady stream of cash return. Amazon has barely dipped its toe into share buybacks and never paid a cent in dividends. But surely it has a history of strong profits, at least? General Electric, whose market cap Amazon recently overtook for the first time, earned $15bn last year. Amazon has earned a cumulative $2bn in the last 20 years; its price/earnings ratio has risen to almost 1000. Then it must have consistently met analysts' expectations? It has fallen short in 13 of the last 20 quarters. And yet over that period the stock has risen 300 per cent.
What Amazon has offered is growth and a good story. Shifting the narrative in new ways even helps - online book store to the "everything store"; US to international; retail to cloud computing. Eric Dillon, an early investor in Amazon, described his first encounter with founder and chief executive Jeff Bezos: "He swept me off my feet. He was so convinced that what he was doing was basically the work of God and that somehow the money would materialise." Twenty years later, it is still that promise of future cashflows that keeps investors bidding up the stock.
Netflix has also benefited from a recent rerating, not forged on returns as much as the promise of them. Mark Mahaney, internet analyst at RBC, uses the video streaming company to attack the notion that "the public markets suck and they're so short-term oriented". He points to the company generating more enthusiasm and a multiple upgrade when it painted a grander vision of international growth. "Investors will do that for stories that have some proof behind them. The public markets are certainly willing to take long-term views on stocks but you have to prove it."
Third, Tesla. In some ways Elon Musk's company is an even more powerful rebuttal to the short-termist thesis. Amazon and Netflix may have been given space to grow but they also have not tested that patience by frequently passing around the hat for more cash. After its initial public offering in 2010, the electric car maker sold $175m of equity in 2011, $225m in 2012, $360m in 2013, took a year off, and then sold another $750m in August this year, diluting its shareholders each time. The future is not cheap but public investors are more than willing to cough up for a piece of it.
Treat them more kindly and they do not always respond well. IBM has adhered to the supposed Wall Street orthodoxy of cutting costs, leveraging up and paying big buybacks and for a while the stock outperformed. But recently the outperformance ended. The complaint of Stanley Druckenmiller, the hedge fund investor who took a big short position, was not that there was insufficient financial engineering but that the company had not invested for growth.
The wary private tech companies are probably more focused on the poor record of their brethren who have chosen to go public more recently. Square, the payments company, is set to take the plunge in the next few days with an indicative range that suggests it could price below its last private fundraising. Box, the cloud storage company, did the same thing in January and has since fallen further. Etsy, OnDeck, Lending Club and GoPro have all gone public in the last 12 months and are all trading below their IPO price.
Some of these might be being under-valued by the market. Equally, five of the top 10 companies in the S&P 500 are now tech stocks; some of those may be over-hyped. Public markets get it wrong, but they do not always demand instant gratification. tom.braithwaite@ft.com
Copyright © 2015 The Financial Times Limited. Please don't cut and paste FT.com articles and redistribute by email or post to the web.
