Never Profitable Dot Com Goes Public
from the not-so-much-hype dept
Remember the days when dot coms with no history of ever earning a profit could go public? Oh wait. That's today. Traffic.com, a company that's been around for many years, but has yet to turn a profit went public today, though without much fanfare. It used WR Hambrecht's dutch auction method -- a method that Google used, but which still hasn't really caught on. Of course, the fact that the company has a dot com in its name really seems more a function of when it was founded, rather than a real "dot com" style business model. It's real business is providing traffic info to other media, such as radio and television stations -- which is a space with a fair number of competitors. Either way, for years we kept hearing how, after the bubble burst, no companies could go public without first showing solid evidence of profits. Apparently that standard is going away.
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What about their XM Radio customers?
-zeddock
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How do you value an IPO with no profit?
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Re: How do you value an IPO with no profit?
Person One buys at $10.
Person Two buys at $12.
Stock climbs to $20.
Both sell and are richer.
The buyer's stock is worth $20/share.
Who loses and why? Please explain.
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Re: How do you value an IPO with no profit?
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Re: How do you value an IPO with no profit?
Company is founded by bill & ted, who work hard at it for 6 months, and get a couple of VC's (A &B for arguments sake)to back them.
A&B offer term sheets which offers Bill & Ted $16 million of funding for 80% of the company. This suggests a post-money valuation of $20 million, and a pre-money valuation of $4 million.
There is a second round funding a year later, where VC C&D jump in the ring, and offer to fun an extra 10 million for 20% of the company.
This post money valuation suggests the company is worth $50 million, and A&B, and Bill &Ted have had their share holding diluted (they used to own 80% now they own 64%, and 16% respectively,but it is a bigger pie being cut. 6 months later B&T think they have a customer, and in a burst of irrational exuberance, prompted by the VC's decide it's time for the exit strategy, and hire a reputable Silicon Valley bank who have never touched a dodgy deal in their life to IPO them. The IPO raises a $100 million with 1million shares being issues to willing punters some institutional (mugs), some private (fools) at $100 each and the VC's cash in some of their chips with a modest return on their original 16million
Indeed, Bill & Ted's excellent venture is all the rage, and the share price rockets up to $150 on the first day suggesting that the company is worth 150 million.
At this points the VC's sell most of their remaining holdings, and retire happily to the nearest bar to celebrate.
When the company is floated, the mugs - er private investment profeessionals who buy the shares at $100 do so, because they believe this cmopany has a certain value associated with it's future revenue growth potential. It very quickly comes apparent that B&T's estimation of their earning potential was wildly inaacurate, and if the company remains valued at 150 million, that is equivalent to the next 150 years of future earnings. Most companies in their sector are actually being valued at 10 times future earning's/ suggesting the shares are 15 times too expensive. It is at this point that the the people who bought at $150 are going to start feeling stupid. B&T are going to leave, blame the new management, and the short-sighted analysts and speculators and start a new venture as experienced entrepreneur's repeating the cycle again.
To move back to yuour example above, in order for the stock to be valued at $20 it means that someone has paid $20 for it. If the performance of the company does not justify the stock's valuation it's going oneway - DOWn.
Now someone has bought it at $20 he wants to sell - but there are no buyers at 20, so he sells at 19. the stock descnds further 18,17, 16 and unless you are shorting it, you are not going to be making any money.
In summary, and I could have said just this; when the stock is revalued downwards,and someone has bought it for a higher price, they have a loss on paper.
Disclaimer.
The above scenario is a figment of my deluded magination and bares no similarity to any event EVER (and if it does it's a coincidence, and it wasn't me)
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Re: How do you value an IPO with no profit?
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Re: How do you value an IPO with no profit?
Imagine: Suppose some sage (Sage) decides the stock should be valued at the net present value of its stream of future profits, plus the amount its current assets exceed its current liabilities - sounds fairly reasonable. But lets say this would yield a stock price between $30 and $45 per share, depoending upon what you believe about future profits and their timing.
Sage buys stock at $30, holds it while it rises to $45 and then sells knowing it is overpriced and must now fall.
But the stock continues to rise to $275, falling in later years to $130.
Was Sage really a sage at all?
Prices are market determined - hard to say how stock is valued (if there were a reliable formula, the risk of buying stock would be much diminished...)
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No Subject Given
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Re: How do you value an IPO with no profit?
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Re: How do you value an IPO with no profit?
This is *so* wrong. If this was true then the whole concept of wealth creation wouldn't exist.
When a stock is appreciating, who is losing? Short sellers and that's it. And you can't short IPOs anyway. So who is losing?
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