To close out the week, a short meditation on value, or, more precisely, how assets are valued in today’s markets.
Do you recall the pre-direct-listing hype Coinbase enjoyed? After reporting its estimated first-quarter financial performance, interest in the domestic cryptocurrency trading giant ran red-hot.
When Coinbase set a $250 per-share direct listing reference price, it was broadly viewed as modest, if not downright low. Of course, a reference price is just that — a reference — so it wasn’t too big a deal. But it also wasn’t surprising that Coinbase shares traded as high as $429.54 on their first day, according to Yahoo Finance data.
Coinbase equity hasn’t topped $400 in any following day and is now under the $300 mark, with more declines set to arrive as trading commences. Its reference price looms, and suddenly a price that felt intensely conservative before Coinbase began to trade is starting to look nearly reasonable.
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There have been other notable declines in value among some recently public, more technologically differentiated companies. The Exchange has watched with something akin to polite confusion as the value of Root, a neoinsurance company, fell to a third of its public-market highs after going public, even though it beat growth expectations in its most recent quarterly report.
We could toss UiPath into our trend of wildly meandering value. The company’s initial IPO price range targeted a price as low as $43 per share. Today it’s worth $76.75 per share in pre-market trading.
No one knows what anything is worth, again. This is the feeling I get while watching the markets work to determine how to value assets as diverse as startups crossing the private-public divide to the value of Bitcoin, which was supposed to keep going up. Until it suddenly reversed gear.
Frankly, we’re still dealing with new-enough models — or big-enough guesses about the future baked into business models — that it’s hard to really value the most uncertain (and therefore most exciting) companies, let alone cryptocurrencies. Let’s discuss.
Value?
Root is what put the idea that no one knows what anything is worth back our heads recently. (Regular Exchange readers will recall that we’ve touched on the concept before. Old Crunchbase News heads will remember us chatting about the topic even further back.)
The neoinsurance company priced its IPO at $27 per share, above its target range. After adding around a billion to its coffers, it wound up valued at around $7 billion, depending on how you counted up its shares. That was about double the price at which the company was valued back in August 2019, when a $350 million round put its value at $3.65 billion.
And today? Root is worth about $2.6 billion, per Yahoo Finance. What an up-and-down saga! But over the same period, Root has done pretty much what it said it was going to do: It has used tech to improve its loss ratio and loss-adjustment expenses as a percent of premiums while scaling its earned and written premium results and, at last in its fiscal 2020, generating positive contribution from its service.
All that and, as noted above, it also posted performance figures that in its most recent quarter beat expectations. And yet it’s worth just over $10 a share today. Sure, there’s some nuance to how the company handles premiums and how that impacts GAAP revenue, but it’s an insurance company. Either understand the industry or get the fuck out. So, what gives? Why is Root worth so much less now than it was?
I have no idea.
What seems clear is that the company’s various investors have been wagering for a long time that Root’s tech will eventually allow it to build a more-profitable-than-its-peers-per-dollar-of-premium insurance company. That the market is losing interest in the concept at this point, after helping the company raise lots of money in 2020 to help it reach its full potential, is just odd.
Coinbase’s declines, you could argue, are due to the decline in the price of Bitcoin since the company’s direct listing, but the cryptocurrency is today worth around $50,000, up from around $7,500 a year ago. Surely Coinbase baked some variance in the price of crypto into its valuation? If the recent dip is to blame, Coinbase stock is going to have a hell of a public life.
After all, the company was incredibly clear that some swings in the value of cryptos would occur!
In Coinbase’s case, there are two ways to think about its value. The first is based on an estimation that the consumer trading volume of cryptocurrencies will continue to rise over the coming quarters. If that’s your take, Coinbase should be able to grow like mad. That’s what its early Q1 2021 numbers seemed to indicate before its direct listing, and the sentiment drove its value. Did all those folks give up since? I doubt it. But the value of Coinbase has fallen enough that you have to wonder how much growth has been removed from its worth in its repricing.
Everyone is just guessing when it comes to the future of cryptocurrencies. So perhaps that’s why the value of Coinbase has been so volatile. If everyone is just taking a stab, is anyone really wrong?
The UiPath portion of our chat has been written about enough lately to avoid a reprise, but whatever bankers talked the company into an early IPO price range as low as $43 should be forced to give back their bonuses.
One small note, however, because I can’t help myself: UiPath’s share price is a wager that it manages to leave robotic process automation behind as the tech’s importance fades thanks to an accelerating digital transformation among companies big and small, and improvements to software in general. It appears that the public markets are very bullish on the company executing that evolution. We’ll see!
This is why I only buy index funds. No one knows what anything (interesting) is worth.