Is Stock Valuation Relevant for New Generation Companies?

TL;DR

Stock valuation remains relevant, but traditional metrics like PE ratios are inadequate for new generation companies that prioritize growth over profits. Instead, metrics such as price per user or subscriber are more applicable. Both private and public market investors are increasingly using similar pricing metrics, reflecting a shift in valuation practices amid changing market dynamics.

Transcript

hello hello my dear friends this is your friend vivek bajaj co-founder of stock edge and eleanor markets friends very very excited to record this face to face her guest today is unbelievable if you are a serious finance professional of someone who understand finance very deeply you must have read his books he is an authority on the subject and you ... Read More

Key Insights

• 🥳 The value of a company is no longer solely determined by traditional valuation metrics like PE ratio or book value.
• 👶 Pricing metrics that capture specific aspects of a company's growth potential, such as price per user, are more relevant for valuing new generation companies.
• 🫥 Private market investors and venture capitalists employ similar metrics to public market investors, highlighting the blurring lines between the two.
• 🪡 Inflation poses a risk to investments, and prudent investors need to consider the potential impact on valuation and adjust their portfolios accordingly.
• 👨‍💼 Family group companies need to prioritize professional management and treat public shareholders as business partners to ensure long-term value creation.
• 🥺 High and unstable inflation can disrupt investment decisions and lead to short-sighted strategies, making prudent asset allocation crucial.
• 🤩 Strong corporate governance practices, financial strength, and pricing power are key considerations when valuing companies.
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Questions & Answers

Q: Are traditional value investors still valuing companies using metrics like PE ratio and book value?

No, the majority of portfolio managers and investors have shifted to pricing metrics rather than traditional valuation metrics. The notion that old-time value investors carefully analyze businesses is often inaccurate. New metrics, such as price per user or subscriber, are now used to value young, growth-oriented companies.

Q: How do unlisted and listed investors value businesses differently?

The distinction between unlisted and listed investors is not as significant as it may seem. Both types of investors use pricing metrics to value companies. While unlisted investors may have an advantage in terms of timing, the metrics and principles they use are similar to those of public market investors.

Q: Can discounted cash flow (DCF) models be used to value new generation companies?

DCF models are not widely used among portfolio managers to pick stocks due to their time-intensive nature. These models are better suited for individual investors with longer time horizons and patience. However, DCF thinking can help in constructing better pricing metrics to evaluate companies.

Q: How do companies without profits or clear business models fit into the valuation framework?

Pricing metrics like price per user or subscriber are often used for companies that are not yet profitable but have potential for growth. Rather than relying on traditional valuation metrics, investors need to adapt to the metrics that reflect the specific stage and potential of these companies.

Summary & Key Takeaways

• The old notion of value investing based on traditional ratios like PE and book value is no longer applicable to new generation companies that prioritize growth over profits.

• Pricing metrics, such as price per user or subscriber, have replaced traditional valuation metrics for young companies that are not yet profitable.

• Private market investors and venture capitalists use similar metrics as public market investors, and the distinction between the two is increasingly blurred.

• Market changes and evolving metrics should be embraced rather than viewed as a decline in value investing practices.