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

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.
Written by Mary Branscombe, Contributor

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.

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