Wiping Away Valuation Tears

It has been an emotional few weeks and I don’t even watch “This Morning” on ITV. No, I have to confess to still being a wee bit gutted about Leinster’s European Rugby Cup Final loss to Stade ROGelais. Munster fans will have different winning emotions this week but I find myself a bit like a start-up owner remonstrating with the valuation gods and demanding to know how a few years of best-in-class performance have failed to add up to appropriate recognition, or silverware. The more considered response to this wailing at the sporting gods is to perhaps acknowledge that sometimes sport does not reward. Similarly, there will be occasional haughty rebukes from the financial commentariat that the markets are efficient and there’s no such thing as a wrong valuation. But, I strongly disagree and award both views a “Jacob” or anything that rhymes with ‘rollicks’ or ‘Rees-Mogg’. Let’s get the emotion and the sport out of the way first.

Leinster might be going through a difficult recognition patch but consider the mighty All Blacks. The New Zealand national rugby team are officially recognised as the most successful sports team in history with a 75% winning ratio over 100 years and a best-selling book on All Black winning culture, ‘Legacy’, featuring on every MBA reading list. So, no surprises that the very first Rugby World Cup in 1987 was won by the team from the Land of the Long White Cloud. However, it was an excruciating 24 more years before the All Blacks won another one. No winning medals for Jonah Lomu or Zinzan Brooke in 1995, and yet that team ranks with the legends. And how about Brazil in football?

The Pele-inspired magic of the 1970 World Cup winning team was but a distant memory when, again, it took another 24 years for the ‘greatest’ footballing nation to be recognised in 1994. No winning medals in 1982 for Socrates, Eder, Zico or Falcao but still we recognise and remember them as one of the most thrilling teams of all time. Enough said on sport. But, the valuations of companies can also endure emotional extremes of frenzied funding or buyer boycotts for extended periods of time. However, the good news is that it rarely lasts as long as an All Black or Brazil silverware famine. The even better news is that financial markets are constantly presenting emotional examples and probable opportunities. Here are my favourite 5 right now….

  1. AI is hot hot hot right now. And the hottest of the hot things is the company you never heard of until last week. Nvidia has just joined the trillion dollar valuation club a week after it told Wall Street analysts they would need to bump up their revenue forecasts by 50% thanks to a stampede of orders for their best-in-class AI chips. Yep, Nvidia on the night added a whole McDonalds Corp in valuation terms($220 billion) and now trades on valuation multiples of 37x revenues(that’s sales, not earnings!) or a price/earnings multiple of 215x! If the money is chasing AI to infinity it’s possible there is opportunity in neglected parts of the market like…
  2. Sports betting was hot. Now, not so much. Fanatics Betting & Gaming just acquired PointsBet’s US betting business for $150 million. That helps Fanatics get into the US market thanks to PointsBet’s 14 state licences which can cost from $10 million(Pennsylvania) to $25 million (New York) each. The interesting thing is that Fanatics swooped after a 94% fall in PointsBet’s share price. Game on, me thinks!
  3. The mainstream media would have you believe AI is going to destroy the earth. Some might recall we were told by tech investment guru, Marc Andreessen, back in 2011 “software is eating the world”. Well, not quite, but SaaS valuations 10 years later in November 2021 hit 20x revenue multiples. Today, the publicly quoted SaaS sector in the US trades closer to 5x revenues. For privately owned SaaS companies those multiples could be closer to 2-3x. Time for investors to eat software?
  4. The US regional banking sector is under huge pressure. Then again, it’s not a big surprise given interest rates have rocketed by 500 bps (that’s 5%) in just one year! Yes, there have been failures at SVB and First Republic but I’m actually pleasantly surprised at how robust the financial system has coped with the interest rate shock. If you’re a survival believer that the worst acceleration is over, then check out the US regional banking sector trading on price earnings multiples below 7x. I’m banking on less fear over time.
  5. Finally, this one is closer to home. If venture capital funds and public markets are taking fright at 500bps tightening of private funding markets, then one can assume the anecdotal evidence of more miserly valuations for start-ups raising money is correct. However, that’s a temporary emotional response and human beings, particularly investors in early stage companies, have no idea what the future holds. So, as Warren Buffett might ask – why is the investment world the only supermarket where the customers flee the aisles when items are on sale at 50% discounts? Throw in 40% EIIS tax rebates for Irish investors in start-ups and one could be forgiven for believing the bots might indeed inherit the earth.


Anyway, some opportunistic food for thought. Banish the Leinster blues and what-ifs, and embrace the certainty of a Brazil or All Black performance-focused mindset. Then think of valuations and silverware as moments in time. And… know that class, greatness and investment returns are permanent.


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