September 20, 2014 Leave a comment
Back in the woeful years of the dot.com boom and bust I worked for a company with a dubious distinction. The value of that company in the stock market was less than the value of the cash we had on our books. What the market was essentially saying is that the sum total of all our efforts as employees was NEGATIVE – we would be worth more if we just shut down immediately and gave back the cash to investors. The fate of that company, of course, was to go bankrupt.
Today there are some other major signs of froth in the market. Yahoo is a classic web / advertising / technology stock with a solid market capitalization of $40 billion. Yahoo’s CEO, Marissa Mayer, was a Google alumni and has been receiving a lot of press for her intelligence and drive to change the company, as well as her good looks.
However, all is not as it seems. The primary value for Yahoo isn’t its online advertising, email, or users – it is the stakes that they amassed in the hot Chinese e commerce company Alibaba (NYSE: BABA) and also Yahoo Japan. In fact, the value of Yahoo is less than the value of these stakes, which are approximately $45B, partially due to the reason listed in this Bloomberg article:
While the market value is large for Yahoo’s Asian assets, that doesn’t necessarily reflect the value available to investors and the company because of taxes, said Ben Schachter, an analyst at Macquarie Securities USA Inc. Yahoo, which would have made $8.3 billion by selling Alibaba shares at the IPO, only reaped around $5.1 billion after taxes.
Taxes are ‘‘one of the big issues,” Schachter said.
While it is true that $45B in investment value isn’t worth $45B because of the after-tax implications, it certainly implies that the market isn’t valuing Yahoo at very much at all. It is also possible that the market thinks that Alibaba is over-valued at its current price of near $100 (after a huge run-up from its IPO price of $68, another huge sign of froth in the market) but the two stocks will generally track closely together now. Yahoo is sort of a broken “tracking stock” for this value.
Another sign of froth is “spec companies”. Spec companies are stocks of companies that are created “from scratch” and their value is based on the promise of management to do certain things in the future with money contributed or raised from investors. Generally you can’t create a spec company – you need to take over an existing listing and then you promise returns to investors who in turn value your company. Brazil was on a tear earlier in the decade and a flamboyant billionaire created a company OSX whose IPO in 2010 was discussed here:
(Reuters) – OSX Brasil (OSXB3.SA) slashed its initial public offering as investors balked at paying a high price for a start-up company with no revenue.
This too recently came to an end as the company OSX filed for bankruptcy protection, but the ability of a firm to launch a start up planning to build a port and various oil and other assets and receive a high valuation should raise eyebrows. Like many other similar plans this one ends up in dust with a recent bankruptcy filing.
I don’t have any sort of unique forward looking view on stocks but the eye-popping valuation and initial one-day jump of Alibaba and other signs have been correlated with declines in the stock market in the past.
Cross posted at Chicago Boyz