How can you plausibly value a ‘unicorn’ business?
A recent cartoon in the FT suggested valuing so-called ‘unicorn’ businesses was simply a matter of thinking of a number – which, given our broadly downbeat view of floatations, seems as plausible a method as any
On 1 April, the Financial Times ran a cartoon of four junior staff each holding a finger in their air while an onlooker explains to a co-worker: “The interns are learning how to value a unicorn today, Frank: they have each licked a finger and are now holding it in the air to see which way the wind is blowing. They will then think of a number and add a sprinkling of zeroes.”
As you probably know, in the world of investment, the term ‘unicorn’ is used to describe an unlisted start-up business that has reached a paper valuation of at least $1bn (£760m).
We have touched on the idea from time to time, here on The Value Perspective, including in Basket case, when we considered the sort of maths that would be involved in making returns from an entire portfolio of such businesses.
The date of the FT cartoon would seem significant – no, not because it was April Fool’s Day but because ride-sharing business Lyft had just floated on the US’s Nasdaq exchange at $72 a share.
The largest US tech listing for two years
Towards the upper end of its proposed price range of $70-$72 – which a few days earlier had been raised from $62-$68 – this valued the San Francisco-based company at $24bn in what has proved the largest US tech listing for two years.
In the weeks since, short-sellers have taken quite an interest in the stock, helping to push the share price below $60 – a situation some market-watchers have been monitoring with great interest, given how Lyft’s great rival Uber is planning its own floatation next month.
Uber’s prospectus was published on 11 April and reports suggest the company plans to raise some $10bn at a valuation of as much as $100bn.
We make no comment specific to either company’s floatation or prospects – except in relation to our own area of particular interest: valuation.
In its own prospectus, Lyft had offered a disarmingly frank list of “Risks related to our business and industry”, the second of which was: “We have a history of net losses and we may not be able to achieve or maintain profitability in the future.”
Clearly a significant number of investors were unfazed by that possibility – as they were about the first risk factor highlighted by Lyft: “Our limited operating history and our evolving business make it difficult to evaluate our future prospects and the risks and challenges we may encounter.”
It is for precisely such reasons that we have always been wary of floatations, here on The Value Perspective, and why, rather than laugh at the FT cartoon, our immediate reaction was: “Seems as plausible an explanation as any.”
Investment Specialist, Equity Value
I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.