Witnessing an anti-gravity phenomenon
My first love of science was newton’s laws of motion. Rule-based logical examples and derivable.
Fast forward after 25 years of corporate experience in financial services, I now deal with US financial reporting. Understanding accounting concepts and their application play an important role in this business, again rule-based knowledge and I love it.
In recent days, there are three incidents, which shook the foundation of my knowledge.
Crypto Currencies: I studied that every currency is protected by the sovereign guarantee and it is a promissory note from the government to the holder. The more powerful (financially and military) is the country, the more valuable is the currency. As a result, about 50% of the world’s wealth is stored in US dollars. Most money is available in the digital format and banks are the custodian of our wealth. These banks have invested in large secure servers that determine the units we own and transactions between two parties are strictly confidential. In case of default of a bank, we can reach the respective sovereign government-appointed agencies. Only the government can issue currency and can even de-monetize it.
None of these currency principles applies to Crypto Currency, where the entire ledger is an open book and which is stored on unsecured decentralized public computers. It is the consensus that will determine if my transactions are valid and the units that I hold. Adding more fun, anyone can launch its own currency, just copy the open-source any of the crypto code and run it on at least one computer. The estimated value of the active crypto market is currently more than 1 Trillion US dollars and growing every year.
GameStop Stock: Jan 2021, a group of retail investors of Reddit’s ‘Wallstreetbets’ forum rallied together and short squeezed a few wall-street funds (mainly Melvin Capital) who were going short on this stock. As a result, these firms were forced to book huge losses, this event was projected as a victory of the public over market movers (Wall Street).
GameStop is a brick and motor gaming rental company (similar to DVD/VCR rental shops that used to exist in our neighborhood). Now game producers are migrating to digital launch and some of them never introduce a physical copy. Last three years the company revenues have dropped drastically to $5.09B (2021) from $8.29 (2019) and every year they are forced to close more than 1000 stores. All fundamental analyses will show that the stock should be valued below $10, still, it is trading above $100, that too after one-year post short squeeze event.
Uber IPO: They made a bold IPO statement ‘We may not be able to achieve or maintain profitability in the near term or at all’. They went public in 2019 with $82.9B valuations, that year they reported $13B revenue and $8.4B loss. Since then capital market across the globe is flooded with IPOs of loss-making tech-enabled companies, including unicorns of India.
The valuation of negative Price-to-Earnings (P/E) stock is out of syllabus question, we can value a stock for future earnings (let’s say after 5 years), but how to determine the share price of a company that claims that they may never be profitable
Despite possessing a decent educational background and rich professional experience, I am not able to appraise the above-mentioned financial assets.
Is it only me?