Hacker News Reader

Comment by samnwa | Hacker News Reader

They recently raised funding at $47 billion though. So it's more than "just a report".

Yes, Softbank invested at that valuation. That's their problem, really as that's a crazy valuation.

For an IPO underwriters will look for a more reasonable number as they have to actually flog the shares to the market.

If the IPO goes ahead at 10b valuation, Softbank will have to write off a massive amount and thus they are unsurprisingly fighting against it.

It may be a crazy valuation but it's legitimate, someone paid money at that valuation.

House prices in X are crazy, but people will pay that, so that is a valuation.

Yes eventually the buyers and sellers will have to balance out, starting from a price someone has actually paid seems entirely reasonable though.

The IPO underwriters started off mentioning a $65bn valuation, most probably based on the $47bn previously paid.

One investor paid that price. That's the issue with illiquid assets that suddenly become liquid: What one person is willing to pay may not represent the market consensus.

A house or a piece of art is a bit different because you always only need to find one buyer. But a company's shares traded on the open market are extremely liquid.

If I go to the stock exchange and buy one share of a company at double the going rate, then until another exchange occurs my price is the going price, and the 'value' of the company as doubled.

I'm not saying its the answer, I personally find it unsatisfying, but it is an answer, and on some levels the only answer that matters.

Why do you think your share determines the price of all the other shares? Is it special somehow? If nobody traded at all for a year, would that mean the company is worth zero, or that its worth is undefined?

I have shares I havent traded in a while, if I go on to my account I will be shown the latest price along with a profit or loss. That latest price is based on what the last person actually paid, that's the only thing that makes it special. But don't forget that theres 2 sides to the market, it's the last price someone agreed to sell at, because that's what we are talking about, the crossover where buyers match sellers.

Now if I decided to sell my shares based on that, would I be guaranteed to also get that price? No, there could be a flash crash, there could be results just announced, there could be any number of reasons to make the stock go up or down, or more precisely attract or scare away investors. In general though I would expect to get a figure close to the price that I saw, because theres not much that can fundamentally change in the few minutes between trades. On a stock that hasn't been traded in a year, the only thing that really changes is the error bar, the price isn't going to be within 0.1% of the last one, it's going to be within 100% or something.

Having someone actually pay money for something really is the acid test. I can slap a price tag on something, but if no one buys it than is it really worth that? We can sit around coming to more or less reasonable valuations, but ultimately if Wework floats and trades at $100bn valuation, then no amount of armchair opinioneering is going to change that, people are putting their money where their mouth is, and as I seem to mention on every stock market thread, the best thing about the stock market is you can put your money where your mouth is.

"Having someone actually pay money for something really is the acid test."

Ah, but having someone actually pay money for 0.0000001% of something really is not the acid test.

If someone pays you $1 to sit in your car for a minute, given that cars have a reasonable lifetime of around 15 years under normal conditions before being scrapped, then obviously your car is worth about 8 million dollars. Or not.

There are economies of scale, and various other things that need teasing out here though.

If you pay me $1 to sit in my car for 1 minute, the setup costs (time) dominate the actual act. I'm not sure why someone would pay me to sit in my car for one minute but I'm sure we could tease out some other reasons.

If I'm only buying 0.0000001% of a company, I'm getting proportionately less than someone buying 10% or 100%. They can start giving people board seats, the can actually ask questions of board members and expect an answer, so I would expect, and indeed there is different valuations for me buying 0.0000001% and someone who buys a large %age of a company.

This price difference applies to many (all?) things, if I buy 1 X if would expect to pay proportionately more than if i bought 1000000 X. We can all accept that the price of a coke is X, whilst also accepting that we'd get a discount buying more units. Likewise if I wanted to buy 0.000001% of the global steel supply, id expect to pay the market rate. If I wanted to buy 100% I'd have to pay more than the otherwise prevailing rate.

Having said all that. To actually return to wework. Their business model is taking a big building and parcelling it up into small pieces. How do we value that building? Based on the whole building, which non of those tenants would be able to afford, and it's lower than the sum of all those small parcels the tenants have, but the value of the building is informed by the willingness of some smaller tenants to come together and rent parcels, so....

As I said on a prior post, it's an answer, not the answer. The price for the whole is different to the price for pieces. The prices for thinly traded assets will be impacted if you start flooding the market. One market will value an asset differently to another. Nevertheless this is a data point, and at this stage the best we have.

Ps Softbank have bought a hell of a lot more than 0.00001%, I believe they've invested about $8 billion overall.

Valuations based on investments that have liquidation preference are meaningless. It's analogous to me offering to give you $100K to own 1% of your house, but only if am also guaranteed the first $200K out of any sale. In some sense perhaps I just valued your house at $10 million, but in my perspective I just bought in at half-off the actual market value. I can still lose money if the house sells for less than $100K, but I could still be perfectly happy with my investment even if it sold for a 1/50 of the "valuation".

Right, but that liquidation preference would be junior to all other liquidation preferences, and they've already raised over $12bn, its also junior to debt, and they were seeking to raise $6bn as part of this floatation, plus whatever other debt they have. So quite clearly given that liquidation preference is now potentially worthless, they do need to base their valuation on some kind of reality.

Reply on news.ycombinator.com