This weekend, I was really pondering why internet stocks like Google, Yahoo and eBay are so highly volatile? Why do their prices just jump all over the place? Why even analysts continuously re-value their positions on them? That led me to think about how these stocks are valued in the real world and if you ask me, I wouldn't even know where to begin.
If you think about it, valuing the traditional corporations are a lot easier: the ones with a solid track record of performance, with billions of dollars in assets, etc. Take IBM (a "technology" company) for example, a company that has been around before my grandpop, that has a history of ups and downs. You look at the industry, and it's tech, which is in a relatively mature stage, with limited room for growth and intense competition. Unless IBM comes up with anything new, you just don't expect their share prices to jump, nor to plummet either. You see, you can forecast the performance of these companies with a bit of common sense, and a little bit of research. We know where their revenues are from, we know their pricing schemes, we know what their competitors do, and all that can be put into dollars and cents. Do a little bit of forecasting, some cash flow discounting, and you'll probably get a price somewhere in the close vicinity of their current price. If what you get is over it, you can fairly safely conclude their price is undervalued, and vice versa. One thing is also fairly certain: their price most likely will not be less than the company's value (being their billion dollars of asset net of their billions dollars of liabilities, their net equity value per say).
But internet companies are a little different. First of all, they've only been around for let's say, a decade at most. And even then, we weren't too sure how to price them, hence, the dot.com bubble. Even today, though most claim they know how, I still think "yeah right!". It's just plain hard to forecast these companies. First of all, they hardly have any assets, and their revenues are mostly hard to pinpoint (mainly from advertising?). How well can you forecast that? Economy does well, the revenues come pouring in, but when the economy is bad, we can all start to cry. So forecasting the performance of these companies is a little bit difficult. Look for instance, at Baidu (A hotly talked about stock on this website!). Last year, not even at the one-year anniversary of their IPO, and analysts said they were overvalued, keeping their fair value price around 40 dollars. This jumped up to 50 dollars, then 60 dollars, and finally now a fair value price of 70 dollars (still setting the market price overvalued). What were these analysts excuses? Oh, Baidu is performing better than we expected, market is growing faster than expected, Google is less of a threat, blah blah blah. Basically finding reasons to cover up their asses. They suck, admit it! They have no clue how to value these stocks, and because of this, making their prices ridiculously high and volatile.
I don't know, these were just some of my thoughts on it. It's hard to come up with a reasonable value for these companies. And right now their prices are just rising on the hopes of investors, and the fund managers who have a say in their prices with their buys and sells. It's scary, and I wouldn't buy them in real-life, but I guess its fun to do so here.