,
10 tweets,
2 min read
Read on Twitter
Good piece from @wsj today on growth in public markets - wsj.com/articles/why-i…
A couple of additional thoughts. By the way, nothing here should be taken as investment advice and full disclosure, a16z portfolio companies are referenced in the story. See a16z.com/disclosures for additional important information.
Comparisons to the Tech Bubble are always fun, but the data are starkly different: (i) 630 Tech IPOs in 99-00 vs 450 in the decade from 09-18; (ii) median revenue for 99-00 class ~ $17m vs ~$140m for 09-18; (iii) median price/sales multiple for 99-00 class ~45x vs ~6.5x for 09-18
Why might public market investors pay a premium for growth? B/c there is almost no growth left in the public markets. The nearly 2 decade decline in the # of IPOs + companies staying private longer means most growth have shifted to the private markets. Supply and demand matter.
But, have public market investors abandoned fundamental ways to value companies? Was Benjamin Graham wrong that in the long run, the stock market is a weighing machine, valuing fundamental cash flow?
If you talk with public market investors, the answer is no. So what might explain how public investors evaluate companies that don’t currently generate cash flow? Unit economics + market size
Unit economics – e.g., what does is cost to acquire a customer vs lifetime value? Are their particular markets that are more mature in which the company has demonstrated profitability? These may/not be good proxies for determining long-term profitability at the corporate level.
Market size – this is of course related to growth, but most investors will perform a fundamental analysis on how big can the market be and thus for how long can the company compound at high growth rates.
From these inputs, public investors will then build long-term financial models, in which they forecast out the business, to which they can then apply normalized P/E multiples and then discount back that to arrive at some estimate of current fair value.
None of this is to say that everyone gets it right all of the time, but it is a rational way to try to assess value. Different investors will of course apply different assumptions and different discount rates to their models and that ultimately is what makes a market!
