Facebook Is Currently Worth $24 Billion Less Than When It First Went Public
techcrunch.com
techcrunch.com
It seems like a better valuation would be something like, "How much would you have to spend to buy the company." Which at any given instant in time is much higher than the spot price-share product, and also probably fluctuates much more slowly.
One problem with the "how much would you have to spend to buy the company" is that it gives you a much larger answer than the "how much would you collect if you sold the company," but it's hard to see why one measure should be preferred over the other.
It's true that the spot price only measures the valuation at the margin, but the margin is set by the consensus of the market participants (if anyone disagrees with it, they are free to buy or sell until they agree). The price at the margin of trading also reflects expectations of the company without any change in management (which is one reason that trying to buy or sell a whole company can cost much more or less than the spot price).
- A slight miss or hit of earnings expectations in a quarter
really can make a rational person change their valuation
of a company by 20%.
- The market is irrational.
- The spot price doesn't accurately represent the market.
Stock prices are generally considered to be the present value of all future cash flows. In other words, growth prospects are priced in. Because of this, missed earnings can seriously effect value because they can dramatically change market beliefs about probable future cash flows and growth potential. Smaller stocks and high P/E ratio stocks (broadly, growth companies) are particularly vulnerable because the present value of future growth is a higher part of the total value.
Edit: Forgot to mention, empirical data typically suggests that markets initially under-react to earnings surprises.
So I doubt that the price to buy the company would fluctuate much more slowly. And since market cap is an objective measurement, it's often easiest to just think of the market cap, and keep in mind that you will have to pay a control premium if you actually wished to acquire the company.
A vast field of study exists to seek answers to the generalized form of the question you just asked: "What is the value of X?"
I don't know anybody who is entirely satisfied with any of the "answers" the field of economics has given us to that question, so I doubt any answer you get here will really satisfy you, either.
Think about how you would divide this premium between the target and the acquirer. It's actually pretty simple, imagine the next best possibility for the target. If there are many acquirers, the target should appropriate most of that value, hence, a high premium. If the next best alternative isn't as good, the acquirer should capture value. It follows logically that the optimal rational bid for a company is slightly more than the value added in their second best alternative (as an aside, this is really close to how IPO pricing works). Companies aren't necessarily rational though, so in competitive acquisitions companies frequently pay more than the actual value added. Empirically, acquirers in single-bidder acquisitions typically see price-appreciation of about 2% in event studies, whereas acquirers in multi-bidder acquisitions typically see price drops of about 1.33% in event studies. This indicates that acquirers in single-bidder acquisitions typically appropriate some of the added value, whereas in multi-bidder acquisitions, the target company captures all of the value added (plus some) by the acquisition.
A really interesting example of this was RJR Nabisco in the 80s. The idea was to separate RJ Reynolds, the tobacco company, and Nabisco, the food company. RJR was a cash machine, but they had a huge uncertain liability from tobacco lawsuits that was depressing the value of the entire company; the separated company was worth a lot more than the company was together. It was trading for about $55/share, then KKR structured a LBO to buy it and break it up, and paid $109/share (management initially bid $75/share for a takeover). In that case, there were many bidders, so the vast majority of the value was appropriated by the shareholders (in fact, KKR didn't generate a good return). [1]
In general, the market cap is the best indicator of the true value of a company in it's current configuration. That does not mean there is not some other configuration or combination where the company could be worth a lot more. It's worth mentioning that whenever the market price is incorrect, there is an arbitrage opportunity available to move the price to its true value. HFT is basically designed to capture these opportunities almost instantly, which is exactly what you would expect if markets are efficient.
1: I highly recommend the 1993 HBO movie Barbarians at the Gate, about this LBO.
I endorse the story of Barbarians; however, read the book - its better and more detailed. ;) (forgive me my hipster cliche).
How is this surprising? Growth is always priced in. Stock prices move because expectations change, not because a company changes.
Edit: if you need any more evidence to flag it, just witness the quality of the comments this "article" inspired.
Not necessarily. Price movements in a stock are not necessarily caused by bad decisions of the company. Stock prices can change for many reasons outside of the company's control. By the article's logic, the Facebook torched a lot of shareholder value on the day of its IPO. But that day, Facebook made very few decisions, despite its price falling drastically. Rather than Facebook's bad decisions, I'd argue that investor uncertainty was the driver of the price movements.
Graph Search, Site Re-design on all platforms, Newsfeed algorithm changes that increased engagement, Significant growth and mobile penetration in international markets (now over 1.1+ BILLION people) -- i.e. making it easier for people on dumb phones to access Facebook, messaging improvements and stickers (which is HUGELY popular), ...etc.etc.
If we keep saying "the sky is going to fall - just you wait" with no data/analysis to back this up, eventually we all will be proven right. But you're not really saying anything.