The Market is Huge! Revisiting the Big Market Delusion
aswathdamodaran.substack.com
For the high-profile IPOs that have reached the market in 2019, with apologies to Charles Dickens for stealing and mangling his words, it has been the best and the worst of years. On the one hand, you have seen companies like Uber and Slack, each less than a decade old, trading at market capitalizations in the tens of billions of dollars, while working on unformed business models and reporting losses. On the other, many of these new listings have not only had disappointing openings, but have seen their market prices drop in the months after. In September 2019, we did see an implosion in the value of WeWork, another company that started the listing process with lots of promise and a pricing to match, but melted down from a combination of self-inflicted wounds and public market scrutiny. While these companies were very different in their business models (or lack of them), they shared one thing in common. When asked to justify their high pricing, they all pointed to how big the potential markets for their products/services were, captured in their assessments of market size. Uber estimated its total accessible market (TAM) to be in excess of $ 6 trillion, Slack’s judgment was that it had 5 million plus prospective clients across the world and WeWork’s argument was that the commercial real estate market was massive. In short, they were telling big market stories, just as PC makers were in the 1980s, dot com firms in the 1990s and social media companies a decade later. In this post, we will start by conceding the allure of big markets, but argue that the allure can lead to delusional pricing. (This post is a not-so short summary of a paper that Brad Cornell and I have written on this topic. You can
The Market is Huge! Revisiting the Big Market Delusion
The Market is Huge! Revisiting the Big Market…
The Market is Huge! Revisiting the Big Market Delusion
For the high-profile IPOs that have reached the market in 2019, with apologies to Charles Dickens for stealing and mangling his words, it has been the best and the worst of years. On the one hand, you have seen companies like Uber and Slack, each less than a decade old, trading at market capitalizations in the tens of billions of dollars, while working on unformed business models and reporting losses. On the other, many of these new listings have not only had disappointing openings, but have seen their market prices drop in the months after. In September 2019, we did see an implosion in the value of WeWork, another company that started the listing process with lots of promise and a pricing to match, but melted down from a combination of self-inflicted wounds and public market scrutiny. While these companies were very different in their business models (or lack of them), they shared one thing in common. When asked to justify their high pricing, they all pointed to how big the potential markets for their products/services were, captured in their assessments of market size. Uber estimated its total accessible market (TAM) to be in excess of $ 6 trillion, Slack’s judgment was that it had 5 million plus prospective clients across the world and WeWork’s argument was that the commercial real estate market was massive. In short, they were telling big market stories, just as PC makers were in the 1980s, dot com firms in the 1990s and social media companies a decade later. In this post, we will start by conceding the allure of big markets, but argue that the allure can lead to delusional pricing. (This post is a not-so short summary of a paper that Brad Cornell and I have written on this topic. You can