Barriers to Entry – Market Valuation and The Barrier to Entry Test October 10, 2019 By Vern Gowdie
Coffee shops are a dime a dozen.One on every corner.They’re the 21 st century pubs.
Want to become an Instagram influencer? All you need is an iPhone, a pout, cosmetic enhancement and a tonne of body ink.
But what about setting up another Sydney Harbour Bridge climb? You can’t.
The more difficult the barrier to entry, the more valuable your business.
That doesn’t mean there aren’t valuable coffee shops or Instagrammers making a small fortune.But these are the exception rather than the rule.
Whereas a business with a captive market is highly sought after and valued accordingly.
Understanding the ‘barrier to entry’ rule is critical to evaluating the value of a business.GoPro
This is an extract from the 20 November 2014 edition of Gowdie Family Wealth (emphasis is mine)
Ever heard of GoPro? It is a waterproof camera you strap onto a helmet, surfboard, wrist or whatever to take video of you in action.
I know of this device because one of my daughter’s bought one for her action man partner.
GoPro is a nifty little gadget that’s taken the action world by storm.This ‘flavour of the month’ mood has followed through to the company’s share price.
GoPro is ‘a wink’ off being valued at $10 billion.This ‘crest of the wave’ valuation is based on — wait for it — a multiple of 200 (yes, 200) times trailing earnings.
When investors discover GoPro can easily be replicated by strapping any Asian waterproof camera to your body , it’ll be game over .
With such a low barrier to entry , it’s just plain dumb to attribute this level of valuation to GoPro.
Perhaps investors should take a picture of the current share price before it takes them on a not so thrilling downhill ride.
My prediction is GoPro is going to experience plenty of downside action in the not too distant future.
At the time of making that observation, GoPro shares were trading around US$70.
The price today?
US$3.70…a downhill ride of 95%.Ouch! Source: Google [Click to open in a new window] WeWork
More recently, the overhyped and over-overvalued WeWork IPO had the seed investors (those who kept funding the ‘new age’ space sharing business model) frothing at the mouth.
The prospect of the gullible public helping them cash out of this loss-making dud was soon to become a reality.
In the 30 August 2019 edition of The Rum Rebellion we wrote…
And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard earned.
WeWork is a company that rents space long term and sub-lets it short term.
Full Stop.End of story.
So how much do you reckon WeWork is worth?
Me…I put it at $0.
But you can’t really do an IPO for $0.
In ‘growth’ story land, there’s an odd relationship between losses and (dare I say) value.
The greater the losses, the greater the value.
Apparently, big losses means the company is building the foundations for growth.
Personally, I think they are just digging a big hole into which investor funds will be buried.
Anyway, back to the ‘growth’ story.
WeWork’s IPO valuation is…US$47 billion.
Is it worth it?
My $0 valuation was based on the barrier to entry test.
There are lots of businesses operating in the co-working space.The biggest is a company called Regus.
Here’s an extract from The Rum Rebellion on 30 August 2019…
Regus is the leading global workspace provider.We have built an unparalleled network of office, co-working and meeting spaces for companies to use in every city in the world.It’s an infrastructure to support every business opportunity.
Regus is part of IWG (International Workplace Group).An almost identical business model to WeWork…almost.
Here’s a comparison between the two businesses…
When I said ‘almost’, well IWG is almost 8-times the size of WeWork.
There’s almost US$2 billion difference in profits between the two businesses.
And, yet, WeWork is valued almost 13-times more than IWG.
You just gotta love the brilliance of the bullshi**ers behind these growth stories.
Fortunately for the mug punters who believe this bullsh*t, the WeWork IPO has been pulled.
With each passing week, the market seems to be edging closer to my $0 valuation.
This is the headline from the 4 October 2019 edition of Fox Business : Source: Fox Business [Click to open in a new window]
WeWork is burning cash at a rapid rate.
Unless the business can source additional funding from persons with more money than sense, WeWork is going to be slamming the doors shut on those 425 locations.
And even if by some miracle WeWork is thrown a financial lifeline, that won’t be the end of it.
This thing will need to be kept on financial life support for a very long time.
Better their money, than mine.
The seed investors who bought into Adam Neumann’s (the co-founder of WeWork) vision forget the golden rule of ‘barrier to entry’.
A bigger con
Which brings me to one of the biggest con of recent times…no, it’s not the central bankers ability to play God.
It’s the crypto-currency mania.
According to Wikipedia (emphasis is mine)…
‘ The number of cryptocurrencies available over the internet as of 19 August 2018 is over 1600 and growing.A new cryptocurrency can be created at any time .’
How true that last sentence is.
The following is a screenshot from CoinMarketCap.
The last on the list is ALLCOIN, crypto currency number 2392.Source: CoinMarketCap
Since 19 August 2018, the number of crypto offerings has increased by 50%.
What’s the barrier to entry?
Not much.
A computer, some programming skills and a marketing story.You’re in business.
The big three — bitcoin, Ethereum and XRP — have the lion’s share of the crypto market.
However, even these ‘stalwarts’ of the crypto world have taken investors on a wild ride.
From the manic days of late 2017/early 2018, there’s been a bit of air let out of the crypto tyres.
The following charts are Australian dollar prices.Source: Coin Desk .