A Reflection on Asset Valuation in Current Markets

As the week concludes, let's consider the concept of value, specifically how assets are assessed within today’s financial landscape.

The Coinbase Example

Do you remember the significant anticipation surrounding Coinbase prior to its direct listing? Following the release of its projected first-quarter financial results, interest in the leading domestic cryptocurrency exchange surged.

When Coinbase established a $250 per-share reference price for its direct listing, it was generally perceived as moderate, even potentially undervalued. It’s important to remember a reference price serves as a guide, and wasn’t a critical factor. However, it wasn’t unexpected that Coinbase shares reached a high of $429.54 on its debut day, as reported by Yahoo Finance.

Subsequent trading days have not seen Coinbase equity surpass $400, and it currently trades below $300, with further price reductions anticipated. The initial reference price now appears increasingly sensible, contrasting with earlier perceptions of its conservatism.

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Broader Trends in Valuation

Other recently public, technologically advanced companies have also experienced substantial declines in valuation. The Exchange has observed, with a degree of bewilderment, the fall of Root, a neoinsurance provider, to one-third of its peak public market value, despite exceeding growth projections in its latest quarterly report.

UiPath also exemplifies this trend of fluctuating value. The company’s initial IPO price range began at $43 per share. Currently, it is valued at $76.75 per share in pre-market trading.

The Uncertainty of Value

The fundamental truth is that determining the true worth of assets remains elusive. This is particularly evident when observing the market’s attempts to value entities ranging from startups transitioning from private to public ownership, to cryptocurrencies like Bitcoin, which were previously expected to continually appreciate.

The reality is that we are still navigating relatively new business models, or substantial projections about the future integrated into these models, making accurate valuation challenging. This is especially true for the most innovative – and therefore, risky – companies, as well as cryptocurrencies. Let’s delve deeper into this topic.

Determining Value in the Market

Recently, the question of inherent worth was brought to the forefront by the case of Root. As seasoned readers of the Exchange may remember, we’ve previously explored this very concept, and those familiar with past Crunchbase News coverage will recall earlier discussions on the subject.

The neoinsurance firm initially offered its IPO at $27 per share, exceeding its projected range. Following a capital injection of approximately one billion dollars, the company’s valuation reached around $7 billion, contingent upon the precise share count. This represented a doubling of its value compared to August 2019, when a $350 million funding round established a $3.65 billion valuation.

Currently, Root’s market capitalization stands at roughly $2.6 billion, according to Yahoo Finance. This represents a significant fluctuation in fortune. However, throughout this period, Root has largely delivered on its stated objectives: leveraging technology to enhance its loss ratio and loss-adjustment expenses as a percentage of premiums, while simultaneously expanding its earned and written premium revenue, and ultimately achieving positive contribution from its service in fiscal year 2020.

Despite these achievements, and recent quarterly performance exceeding expectations, the company’s stock now trades at just over $10 per share. While there are complexities regarding premium handling and its impact on GAAP revenue, it remains an insurance business. A thorough understanding of the industry is paramount. Therefore, what accounts for this discrepancy? Why is Root currently valued so much lower than before?

The answer, frankly, is unknown.

It appears that Root’s investors have consistently bet on the company’s technology to ultimately enable it to achieve greater profitability per premium dollar than its competitors. The market’s waning interest in this premise, particularly after facilitating substantial fundraising in 2020 to support the company’s growth potential, is perplexing.

The decline of Coinbase can be attributed, arguably, to the decrease in Bitcoin’s price since its direct listing. However, Bitcoin is presently valued around $50,000, a rise from approximately $7,500 a year ago. Did Coinbase not anticipate some degree of cryptocurrency price volatility in its valuation? If the recent downturn is the primary cause, Coinbase’s future as a public company could be challenging.

After all, the company explicitly acknowledged the potential for fluctuations in cryptocurrency values!

Regarding Coinbase, its value can be assessed in two ways. The first hinges on the expectation that consumer trading volume of cryptocurrencies will continue to increase in the coming quarters. If this holds true, Coinbase is poised for substantial growth, as indicated by its early Q1 2021 results prior to its direct listing, which fueled its initial valuation. Have these investors abandoned their positions? It seems unlikely. However, the decline in Coinbase’s value raises questions about the extent to which future growth has been factored out of its current worth.

Predicting the future of cryptocurrencies remains speculative. Consequently, Coinbase’s valuation has experienced considerable volatility. If all assessments are essentially educated guesses, can anyone truly be considered incorrect?

The situation surrounding UiPath has been extensively covered recently, negating the need for further discussion. However, any investment bankers who advised the company to set an initial IPO price range as low as $43 should have their bonuses revoked.

A brief observation is warranted: UiPath’s share price reflects a belief in its ability to transcend robotic process automation as its significance diminishes due to accelerating digital transformation and advancements in software. The public market appears optimistic about the company’s capacity to successfully navigate this evolution. Time will tell!

This is precisely why a strategy of investing solely in index funds is preferable. Accurately determining the worth of any compelling venture remains elusive.