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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

30/04/2019

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

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.”

Author

Andrew Williams

Andrew Williams

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. 

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