I am a trader as well as a long term investor.
Since, some recent tech companies have completed their public listing, I had a question regarding their soaring valuations.
Companies like Paytm & Zomato have completed their public listing at huge price, compared to their actual revenue/potential growth. Both of these companies have been posting losses for many years, to the tune of thousands of crores every year. These companies have mentioned in their red herring prospectus, that they have no idea when the company will become profitable, or their main/important business via which they will make profits. Why do these companies have valuation of over â‚ą 1L crore?
Companies like Yes Bank have been reporting profits since it’s inception and have posted losses only in the past few quarters. Even after huge losses reported by Yes Bank, in past few quarters, it has made a comeback and is back in profits. But even after being profitable, it’s valuation is only ₹ 35-40K crore.
Why?
I am unable to understand the above. Please enlighten me.
However, the above statement is not as simple as it sounds. This is not the full story of YES Bank.
I am a shareholder and own this business and due to sheer GODLUCK, the shareholders escaped from taking a full loss on their investment. (As shareholders we lost so much but at least something was left behind.) What is even saddening is the AT1 bond holders who lost their entire investment. The Bank under the leadership of Rana Kapoor had done so many irregular things that the Bonds were sold as superior FD to retired people who did not understand the Risk.
I feel this is the first time in the anals of Indian banking history that the bank was supported by SBI but had to write off the AT1 Bond Holders in full . The depositors were protected which is a great thing.
If SBI and other private banks had not come in to save this bank this could be another story.
God Bless Rana Kapoor for ruining millions of people who owned AT1 Bonds just because they were offered at a higher interest rate and RMs of Yes Bank who sold these Bonds to them as superior FDs.
Hence I find this comparison unfair on Paytm and Zomato.
Disclaimer: Invested in YesBank and went through turbulent times. I am sure there will be many like me. Selling the stock at the current market price is equal to getting nothing vs holding it. Hence just holding the stock.
If comparing the valuation of Yes Bank is not correct, since it has lost trust, then why are Paytm/Zomato valued higher than trustable businesses like Dabur, Marico, Godrej Consumer Products?
If start-ups’ valuation is according to potential earnings, then Paytm should actually be valued at zero because it’s burning money since almost a decade, and may not be cash-flow positive (forget being profitable) until 2030, as mentioned in a report by Macquarie - Paytm a Cash Guzzler, Lacks Focus, Says Macquarie Research Report; Check Details Here
Paytm has itself mentioned in it’s prospectus that they have no idea when they will be profitable, because of high operating expenses (in-spite of being a online/digital business, which should actually have less expenses than a traditional business).
I am unable to understand why Paytm is not valued at zero, when it’s reporting losses since a decade, and there are no signs of being profitable.
“Tech-First” “New Age” Companies are treated differently in Valuations. At this point, even market veterans have given up on applying old-trusted-proven principles in valuing Tech Companies. You may choose to do so, but then you have to make peace with the fact that you may miss out on some good opportunities as well.
Is it “fair” from a purely accounting perspective? well no, I won’t say so. But does it make sense for markets to do that. Yes. Markets have always worshipped the New and Shiny. The Old world giants have peaked out their growth story. They are either going to stay at their pace, or deteriorate, and one of the only reasons they are still in the game right now is because Capex is expensive and a barrier to entry, but for how long, that remains to be seen.
Nithin Kamath of Zerodha wrote a very nice piece on this actually, if you haven’t read it, here.
When a stock is down that is when to bet on it. Not when it is inflated and on steroids. Fictitious valuations tend to vaporise pretty quickly when market decides so. Nobody can time the market - say it will be at this price at this time. But you can probably find a fair price to pay and buy stock at a point of time. Then be patient and leave it to the market.