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New Valuation Metrics in The Biggest Bubble of All
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With stocks reaching unprecedented highs during the Internet Bubble, analysts often had to convince investors that all the money they had poured in was “worth it”.
The result was a variety of “new metrics” that would be used to value stocks.
The thinking was that the New Economy stocks were a breed apart and the same standards that applied to Old Economy companies would not suffice for these ‘hot companies’. One often so valuation criteria such as price to earnings, price to book value, and even price to sales abandoned in the favour of a whole new set of metrics.
This included things like “page views”, measurement of “engaged shoppers”, “mind share” etc. While there is fundamentally nothing wrong with these media metrics, one cannot confuse them with the measures used for valuation criteria.
For example – Analysts often gushed about “engaged shoppers” on DrugStore.com – they kept talking about how 48% of all shoppers were “enagaged”. No one was bothered about whether these “engaged shoppers” were spending a dime. DrugStore.com, which was valued at $67.50 per stock at the height of the Bubble, eventually became a penny stock.
This hasn’t entirely disappeared today. One still sees analysts pushing Facebook on the pretext that it has more signups than any other network and that users come back to it more “frequently”. It’s cash registers unfortunately, aren’t ringing. One needs to note however that this is not an industry wide phenomenon across dot coms as was in the early 2000’s.
Using media metrics for the valuation of dot coms is often wrong primarily because most Internet related services are free and easy to access. Thus while a user may like a service because it is free, it is difficult to access whether the user will use the particular service if asked to pay.
One needs to also note here that if it is a media vehicle such as Facebook or Orkut, which needs to be valued, one needs factor in Media Metrics to a certain extent because that is the worth advertisers will eventually see. This is different from an e – commerce sight whose primary business model revolves around selling and distribution. For such a website, media, engagement, or any such metrics do not really matter.
However, one needs to be careful when a company drum beats its media figures to investors without substantial advertising revenue. If the vehicle is so successful, wouldn’t advertisers have jumped on board already, and wouldn’t they be paying fat sums already?
Media metrics are forever changing. Engagement metrics as we knew them in the early 2000’s have evolved as well. Companies like Nuconomy are working overtime to ensure that our definition of “engagement” is constantly updated and more relevant. I’m a little concerned by the fact that they seem to be pitching for “engagement as the new currency” for advertisers. Are we back to square one again? Even though advertisers want ‘interaction’ with brands, the sums they are willing to spend aren’t clear. While Shahar Nechmad gives an accurate description of why engagement is likely to topple the other metrics currently in place, one is probably still not convinced that ‘engagement’, the way Mr. Nechmad and his company propose is the best way forward. Or at least the road is pretty blurry. Nuconomy however is well aware of the fact that there is no ‘one size fits all’ approach to their proposal. Hopefully this will ensure a clear road ahead.
For now however, we need to be increasingly careful about the various metrics we use to value companies. One needs to be increasingly adept at analysing what kind of metrics can grossly overvalue a particular company and vice versa. A clear distinction probably needs to be made between various valuation and media metrics.
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