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Tech Valuations - Sometimes You To Wonder....

The WSJ's CFO Journal dated 5/2/16 starts of this way...

"...WSJ’s Christopher Mims writes that the era of skyrocketing tech valuations is already over. We seem to be living through a period of suspended disbelief, as investors and entrepreneurs have yet to realize that the unicorn herd is under stress, and the pressure to become profitable has become more urgent. Startup investment has cooled, valuations are falling and initial public offerings have all but disappeared, but venture-capital funds raised a record amount of capital in the first quarter."

While we've all heard similar pronouncements in the past; why do we keep going through these cycles of only extreme high-flyers welcome, let's over-value and stick the next round and if double-digit growth isn't maintained, then we're all going down the road to perdition?

Ever notice how companies that have and had moderated growth year in and year out have stayed in business for decades and provided excellent livings for all those involved?

Where do you think the disconnect between Wall Street and Main Street?

Answers

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

I think part of it is that many of those companies are profit driven instead of long-term growth driven. If short-term growth doesn't translate into the profit they'd hoped for then the investors are on to the next shiny object. In a way, I think many are looking to strike the business lottery.

I think Jim Collins was on to something when he researched and wrote Good to Great. Many of the companies in the book had slow growth until they changed something within their operations. Then the companies grew moderately. Some in the book aren't the powerhouses they were when he wrote the book, but most are still doing well.

The disconnect is that "main street" is populated with "Joe the Plummers" who are working hard on the ground and unable to stay abreast with what Wall Street is doing. Wall Street folks are considered the high flyers. They live, eat, and breathe what the market is doing so they may profit well from it. I mean, I would if I had the capital to invest in such activities. For a while, I chased solar energy stocks. I made over 200% of my initial investment. The problem, however, is that my initial investment was about $150, so it didn't translate to much of a gain monetarily.

Anonymous
(CFO) |

"Ever notice how companies that have and had moderated growth year in and year out have stayed in business for decades and provided excellent livings for all those involved?"

There is a reason for that. As a CFO I reported to at a 100 year old fortune 200 would say: "Anyone can make hay while the sun shines. It's what you do when times are bad that makes the difference. There is a reason this company is more than 100 years old."

That company is a dividend aristocrat and has been for many, many years. And, while I once sneered at their slow growth and comparative conservancy, my stock holdings in that firm have doubled in value about every seven years and I've received dividends all along, which I've invested in other stocks.

As one gets older they start to realize this kind of wisdom. It's also why I'm no fan of unicorns or other high flying - for the moment - tech offerings even though I'm surrounded by them in the SF Bay Area where I live.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

1. Just like the financial crisis.....the blame list is too long! And yes, we finance professionals are part of that list. After all, we "rationalized" the valuation and it's methodology.

2. If "unicorns" don't do hyper growth, someone else will eat their lunch.

3. I caution everyone about conflating "growth" and "valuation". Although one is a factor of the other.

4. Comparing 100 year old companies and tech companies (as a generalization) is not really apropos. The business and financial motivations are different. Who is to say that Uber (as an example) despite their legal (employee/1099) problem wont live to be a 100?

5. I look at it this way....these tech companies (as an example) can "moderately" grow but NOT doing hyper growth would severely constrain it's growth. WIthout funding, they cannot do the hyper growth. It is a circular justification....meanwhile iit's valuation is skyrocketing.

I present Amazon and UBER (even with their legal troubles) as perfect examples of this.

Whittington Vara
Title: Director of Operations
Company: Wave Contact Lens System
(Director of Operations, Wave Contact Lens System) |

Market expectations may be another reason for the skyrocketing tech valuations. Investors that believe you make money on the buy and not the sale will ONLY accept high valuations when they also think the valuations will continue to skyrocket. If they think FUTURE valuations will not be as inflated, they will no longer buy into the initial high valuations.

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