Insane Value of Companies

How much is a company worth? For a company listed on the stock exchange, that’s easy. Multiply the total number of shares with the price of a single share and you get the value of the company (as seen by the market).

But sometimes, the numbers just don’t add up. Like Matthew Klein showed about Yahoo! in March this year. Yahoo! was valued at $39 billion by the stock market. It owned 24% of Alibaba that in turn was valued at $153 billion. 24% of $153 billion is $37 billion. Did that mean Yahoo!’s own businesses were only worth $2 billion? But wait, it gets even more insane. Yahoo also has a 35% stake in Yahoo Japan, which was then valued at $32 billion. 35% of $32 billion is $11 billion. That meant Yahoo!’s intrinsic worth was…negative!! And you thought Wall Street guys were smart!

Stock markets like to value companies in the same industry (somewhat) similarly. Like all steel companies. Or all airline companies. Then the tech companies complicated that system. Like Apple (both software and hardware). So what do you treat them like: hardware or software? On the one hand, they give away their software for free (think iOS upgrades), which is why analysts decided to treat Apple as a hardware company. But Apple charges unheard of premiums for their hardware, something no other hardware company comes even close to. And yet analysts rate Apple as a regular hardware company! Or take Google. Do you know what Wall Street treats Google as? A media company! Why the insanity? Because analysts couldn’t find a match for a company that gives all its services for free (search, mail, maps, Android, you name it); so they looked at how Google makes money. Since the answer was ads, they looked around, found “media” as the category that makes money via ads and thus Google became a media company! Ever heard of a single news reporter/anchor interview for a job at Google?!

But tech companies don’t always lose in the stupidity of Wall Street valuations. Leonid Bershidsky showed that Facebook, currently valued at a bit over $200 billion means that it is worth more than Vladimir Putin’s “crown jewels”:
“(Russian companies) 0il producer Rosneft Oao, natural gas monopoly Gazprom Oao and state-owned lender Sberbank…combined market cap is $202.3 billion, meaning that Russia’s vaunted energy wealth plus its financial power is worth about as much as (Facebook)!”
Or if you want a positive interpretation, Bershidsky has this to offer:
“10 years of bold innovation using little except your brainpower and some silicon chips can make you wealthier than building infrastructure for decades and having hundreds of thousands of people run it. It’s a fairy tale with a moral almost everyone—with the possible exception of Putin—likes.”

It’s a mad, mad world…

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