Crazy money: Why the stock market can't measure real value

Crazy money: Why the stock market can't measure real value

Summary: With earnings calls from IBM, Microsoft, Google, Apple, and Yahoo coming this week, what do stock market prices actually say about tech companies? Little of value.

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Money is a consensual fiction: It's something that has value because we believe in it. That's doubly true of the stock market. As soon as enough people stop believing in a company, it ceases to exist. RIM's stock market value started to plummet long before its sales did (and its valuation takes no account of QNX's strong position in industries from cars to nuclear power).

Navteq ought to be a huge asset to Nokia, despite how much it costs to keep driving LIDAR-equipped cars around the world. It's true that handheld GPS makers aren't paying as much for the maps that used to be its revenue stream, but in the long run Nokia ought to be able to keep selling maps to people who aren't smartphone competitors (and indeed to RIM, which has to buy its own maps). And Nokia, having spent 45 billion euros on R&D in the last 20 years, earns around 500 million euros each year from patent royalties (like the Wi-Fi patents RIM has finally agreed to renew its licence to use).

Was Instagram really worth a billion dollars to Facebook? Maybe, it if had got to use it as a source of free photos and social information for ads the way its new terms and conditions would have allowed. ("Oops, you caught us," the apology should have said rather than "oops, we were confusing"----the T&Cs were very clear.) What is Facebook itself worth? Well, the IPO stock price was well above what Facebook had been trading at on the secondary market (for pre-IPO shares owned by investors and employees) and it's now trading somewhat below the prices that those folks were seeing.

It's not infallible, but looking at the secondary market is a good way to get a reasonable view of how a rational market sees a company's value. It's certainly a more rational view than using analyst estimates and the stock market reaction to them.

The drop in the Apple stock price after the company announced $13 billion in profits this week was on the lower-volume, more volatile "after-hours" market, but analysts marked down their target price for Apple stock because of the results--even though those results beat their predictions. But that's just the latest of the bizarre stock market reactions.

AMZN misses analyst estimates--up 7 percent. FB hits analyst estimates--down 14 percent. Nokia announces Nokia Music in the US--stock up. Nokia announces the Lumia 920--stock down. The Lumia 920 sells out because Nokia can't seem to make enough handsets to take advantage of the demand--Nokia stock climbs enough to make shorts look like a great investment strategy.

I can understand Steven Sinofsky leaving the Windows team wiping a vast amount off the value of Microsoft stock. Not only does the company lose the leader who rescued Windows from Vista and delivered Windows 7, but his departure is also a poster child for how risky the "devices and services" strategy really is for Microsoft, given that it relies on internal collaboration that the company doesn't reward employees for delivering. But usually, the markets simply aren't rational.

When Steve Ballmer criticizes the stock market it's easy to see it as defensive--but that doesn't mean he's entirely wrong. "The stock market has always had its own meter," he told Forbes last year. "Sometimes it's ahead of itself, sometimes it's behind itself. A broken watch is right twice a day."

One problem is the enormous volume of automatic trading: You don't have to have a bug in your algorithm for the machines to move the market in a direction that has no rational explanation, and have people assume a company has problems. If Dell did go private, it could avoid that whole cycle.

And then there are the analyst reports that seem to have increasingly little connection to reality--from analysts that can't tell the difference between flash the memory and Flash the plug-in, to November sales analysis that omits Thanksgiving, to pointless wishes that Bill Gates drop everything he's doing with his foundation and go back to Microsoft full time. (That makes as much sense as me wishing for a supersonic plane route between London and Seattle; neither are going to happen any time soon, if at all.)

Technology analysis like this is a spectator sport. It's Monday morning quarterbacking from people who seem to have been watching a cricket match--and it tells you nothing about the quality of the products or the abilities of the companies being analysed.

Topics: Microsoft, Banking, Nokia, BlackBerry, Tech Industry

Mary Branscombe

About Mary Branscombe

Mary Branscombe is a freelance tech journalist. Mary has been a technology writer for nearly two decades, covering everything from early versions of Windows and Office to the first smartphones, the arrival of the web and most things inbetween.

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  • rarely do I agree with Ballmer...

    but this time he's right.
    phil_simon
    • Nor do I

      Normally
      But he may have a point, A share certificate is merely a document saying you own a small (or large in Steve Ballmer's case) part of a company It is worth merely what someone will pay you for it in order to "own your share". This is the stock market, merely a way to make or lose "paper value"

      You don't actually own any physical or I.P. Assets.

      Mary, You are quite right about "Analysts" Monday morning quarterbacks is pretty close but I don't think most of 'em could understand the rules of Cricket.
      thetracybros
  • Dow hits 2008 level

    Mary,
    Many believe the stock market is a measure of the health of the US economy. Dow recently hit highest level since 2008. But the US economy is no where near the 2008 status. This is another example of stock market misconception.
    Hal_9001
    • May be ahead of the game ...

      The stock market is future-focused; it almost invariable rises befoe the wider economy does (and starts to fall before the disasters feed through, too). It's not misconception, though it sometimes turns out to be overoptimistic.
      Heenan73
  • The Stock Market Is Nothing But A Fixed Game lke Casino Gambling

    It may have at some time in the past being a legitimate finance operation but as of today and for many years the Stock Market has been to the Wall street crime bosses what Vegas Gambling was to the gangsters of a by-gone era; a fixed game stacked in the favor of the house. At least in Vegas they are honest about the games being stacked in favor of the house. Wall street still tries to portray the stock market as a legitimate source for financial risk that can pay big rewards to he/she who can play the market. The reality is the system is rigged so that the insiders like Goldman-Sachs can win via their computer managed micro-trades that are used to fix the market one way or the other. The whole idea of betting against something was born because of the system being rigged.

    In the traditional Casino Gambling model the house wins only if the guest loses. The Wall street banksters came up with a way to win all the time. HOW? Through governmental Bailouts under the threat of “too big to fail”. If the market goes in the direction that GS bets then they win. If it goes against then they use their computer based micro trades to change the game. And if all else fails as did with derivatives then they come to the Federal Government with hands open and threats of financial collapse if the tax payer doesn’t bail out the losses. This is why it was necessary to get Clinton to put an end to the Glass-Stiegel act which had previously been put in place to prevent this exact kind of thing. So what did our loving government od after the fiasco known as TARP? It passed the Financial Reform act that did nothing in reality and so the same banksters are still pushing derivatives and riding the wave till they once again crash and then they will go back to the Feds for more bailouts. This will continue until either the rest of the populace wakes up and admits to the sham or we as a country spend ourselves soo far into debt that our debt forces the collapse.

    So in closing the answer to the question of “Why Cant the Stock Market measure Real Value” is “because it’s a rigged system in which the goal is to syphon wealth from the masses and into the banksters and their elite friends; a global wealth redistribution scam.
    BlueCollarCritic
  • The Stock Market has no memory ...

    Investors, who are gamblers, even the huge insurance companies investing your pension contributions, have no concept of the past.

    There's NOW and there's their best bet for the future. Period.

    This, of course depends a lot on trust, which is why companies need to be consistent with their story - and why they pay millions to PR companies to talk up their company (and talk down rivals).

    Unlike many journalists (and I'm not talking about this writer), investors can see through much of the BS, and punish companies that overdo the spiel.

    This is why Apple is suffering now. They have distorted the market by over-frequent product launches - great for marketing, but a bummer for those reading the tea leaves - and they've overinvested in positive spin; having promised the universe, delivering the solar system isn't enough.

    Of course Apple is a healthy company; while it's market share will continue to contract, it's sales will rise (it's a growing market), and their profit % shows no sign of suffering.

    But companies whose sales rise spectacularly with 'events', then slide until the next one, coupled with upbeat publicity, means the comapny is not entirely trusted.

    History shows that stocks feed off theselves; rises are overdone, falls are too. There'll be a shakeout of the nervous, leaving the professionals to buy cheap and profit - whenever it bottoms out. But it's unlikely to regain the lofty heights, because they were as undeserved (on performance) as the recent fall.

    Apple needs to learn how to be a star; hubris is not on a stars agenda.

    Less spending on analysts, PR and consultants, more good old fashioned reliability would be a good idea.
    Heenan73
  • Banks Own around 70% of All Stcoks

    So, if anything, stock prices mostly represent what Bankers think. Given that they keep buying T-bills from a Government that can't control it's spending, kind tells you how much they really know about banking and basic economics. Is it any wonder AIG went belly up and needed to be baield out? Greece and Spain need to make room for the good old U.S.A.
    TheSaint777
  • As John Maynard Keynes Said...

    ..."The market can remain irrational longer than you can remain solvent".

    In other words, you can ignore the market definition of "value" only until your funds run out.
    ldo17
  • I can tell you why...

    The whole thing is a scam, wrapped in respectability. The only ones how make money are the insiders. The rest of us are lucky to make chump change. Take the housing scandle. Everyone from the realator to the bankers knew what was going on. (you can get something for nothing) and let it ride, the fix was in on all levels. Only those smart enough to sell out before the crash made it out in one piece. I saw the type of people that were buying houses and ran for the exit. I knew they couldn't pay and stopped long enough to ponder and to figure out the ramifications. The same thing happened with the tech bubble, the S & L scandle. Look at LIBOR if you need more facts.

    You couldn't get me to buy stock if YOU paid me money. I might do it if I could be one of the CEO's with a golden parachute and stadium full of lawyers to keep me out of jail.

    This is a fools game and anyone willing to play it is willing to buy the Brooklyn bridge or swamp land in Florida. Hard assets never lose in value, in fact when all this nonsense is running high they only gain in value.
    mikifinaz1@...
  • A free market

    Company shares are purchased by investors who make their mind up based on different facts, not just how close the company comes to analyst predictions. Nokia has produced nothing interesting, different or compelling, so their shares are down. Ditto for RIM, who are even worse in the innovation stakes. People are going mobile, cloud etc. so Microsoft is down. Apple MAY have lost their innovation drive, so there is a small correction there. It all makes sense.
    lojolon