A View from the Bridge: Gazes Also
On 4 May 2021, the FAANGs’ share prices fell by an average of 2.8% reducing their combined market capitalization by US$213bn. That amount is larger than the individual market capitalizations of AstraZeneca, Sanofi, SAP, and Unilever, to name but a few.
Imagine you are the CEO of a private company hearing this news. You specialize in services which bring people together in a market whose parameters have changed through the application of technology. Your company is seeing growth in demand and you are investing in the business to capture this activity. You decide that the company should “speculate to accumulate” and seek investment from external shareholders to further grow your operations. At that point, what is the current equity capital market telling you about valuations?
Do you reflect that listed companies, involved in similar activities, trade on equity valuations set by multiples of revenue? EV charging infrastructure companies, for example, are valued at multiples as high as 37 times revenue. Should you consider that equity market valuations appear as much determined by geography as corporate finance theory?
The scale of the FAANGs’ market values dwarf those of other, non-US listed companies whose profitability and cash generation are superior. Do you believe, as JP Morgan allows in recent research, that market bubbles are transitory, a warning to the wary but a boost for the brave? We are in no doubt that, like much of the world, global equity markets are changing, possibly permanently.
Valuation methodologies, once the basis of the very qualifications required to operate in the market, are being tested and, possibly, abandoned. Reflecting on the last 12 months, leadership in private companies has been faced with strategic questions such as revenue growth over cost management and cash generation over investment. The answers do not seem to be offered by the public markets.
EC Global believes that it is better to light a candle than curse the darkness. Private companies should consider how they want to be valued, which metric or ratio best describes the market they face and how they face it, and manage their businesses and communications appropriately. For a global equity market which has stared into the abyss only recently, the reflection now returned seems to be “this is a new world, not a new normal”.