Despite the unexpected and unprecedented boom on the stock markets, Dr. Tiran Rothman, VP and managing director Israel of the international market analysis and business consultancy firm Frost & Sullivan insists that there is no bubble. He said, "The capital market is not a zero sum game and what goes up does not have to necessarily come down in the end. The question is what people think will be the revenues of the companies in the future. Are the expectations justified? It's hard to argue with the market forces. It's a variation on the wisdom of the crowd."
Rothman who undertook an analysis of the R&D companies on the Tel Aviv Stock Exchange has now expanded his Ph.D. into a book entitled "Valuations of Early-Stage Companies and Disruptive Technologies."
But it looks like many people will have less money to spend and more debt that they cannot repay in the coming years. So how will the revenues of all these companies increase so much?
"It's said to say but for some years we have had two economies here - the high-tech economy and the rest. In recent years an information revolution took place that has also given value to mankind. If these public offerings divert capital from other sectors to high-tech, which has become the dominant element and carried out a revolution in every field, then there is logic in this."
"Tech companies that come to the stock exchange are genuine. These technologies have matured over very many years including in healthcare and also renewable energy. The R&D Partnerships for the first time allow Mrs. Cohen from Hadera to invest in types of investments that in the past have yielded handsome returns but not for the man in the street. Now the investment is on a platform that provides protection."
"In the renewable energy sector, I don't detect a bubble. There is a real need and the companies are pricing this. Digital health companies are nit supposed to trade on the basis of their revenue but on the basis of the data they have accumulated."
Do you really see somebody prepared to pay for all the data, when the time comes? Can you recall somebody who has bought data for a lot of money and then succeeded in generating revenue from it that justified the purchase?
"It's still in its infancy. We believe that companies will pay for personalized ads, and for research, each in its own field. It's still not there but it will get there."
How do you assess the value of a company before it has revenue?
"Every company like this goes through three stages. The first is proof of concept of its technology. The second is complying with standards. The third is sales. At each stage there is a different model for assessing the value of the company. The companies that are going to carry out the revolution - and we don't want to miss them - are sometimes those that a valuation according to their financial reports is not relevant."
"For a company before the revenue stage, I ask - what is the size of the market, what are the scale of the opportunities and what are the chances of success? Not everybody knows that there are real risks in a renewable energy company just as there are in a life sciences company. If a company does not close financing for a project, it is not necessarily expensive. And the competition is not with companies in the market today but those who will exist in the future."
Rothman has built tables that assess risk probability for companies in different fields at different stages. "Of course these are probabilities for the entire field and the smart trick is to find those that will be successful."
Another way, according to Rothman, to evaluate a company is to compare other deals that have been completed in the same sector, or on the basis of the price in which an expert investor came into a company. But the value of companies on the stock exchange is influenced not only by its real transactions but also by a more complete dynamic of psychology, expectations and the media.
Rothman: "I have also identified situations in which the value rises or plunges for a specific reason. For example, dream companies are priced according to their potential, and people are generally optimistic, and then the sales begin and it takes time for that potential to be realized and that is a point when there is usually a fall in value - death valley."
"There is also the factor of the investors' attention. Ahead of an event in the company, like for example before trial results of a life sciences company, we see a rise in value, even though nothing has happened, and there is no information that we didn't have six months previously but the very act of speaking about the share raises its value, and the person who is pushing even the big company's shares in the US is Mrs. Cohen from Minnesota."
"When the event happens, then sometimes the share does go up and sometimes, all the added value has already been priced in at this stage. And a few days afterwards when discussion about the share has ended, the value can go down to at least what it was before the event. This stands out with life sciences companies because of binary events, but it is true for every share, which rises and falls because of changes in the talk about it, with no connection to the value of the company."
Rothman says that the market also has 'noisy players' who operate by generating buzz rather than based on the value of the company, and when enough 'noisy players,' the company loses any connection with its real value. Expert investors can identify this and benefit from the market failure, for example by going short, but sometimes the noisy investors succeed in blowing up the value of the share over time so that the short experts get burned, and this is what happened with GameStop.
Sometimes expert investors need to show their customers that they are performing better than the market, even if it is not grounded in reality. In such a situation they get caught up in herd behavior and go with the noisy investors and this creates a flawed market that gains ground in one direction.
Perhaps some companies that are difficult to value shouldn't be on the stock market?
"Every company has a place on the stock market. The question arises as to whether to invest in a company and how to get access to them. I say that if you think you don't know how to assess the risk, then don't go into it."
Published by Globes, Israel business news - en.globes.co.il - on February 9, 2021
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