Friday, May 18, 2012

The Ethereal Nature of Stock Valuation & Much Corporate Work Activity

Lately I've been ruminating a bit on the concepts of corporate work and stock valuation... specifically how each can too easily become described as ethereal (definition: adj. Characterized by lightness and insubstantiality; intangible).

Ethereal seems to describe stock valuation in that it feels such a squishy science (i.e. opposite of science). Stock valuation doesn't necessarily say a company is doing well or poorly, but rather predict whether the share price will go up or down from a given point. This may mean the company is well run, with solid employees and a great product, or... it may not. On the may not side of the equation is simply the up or down guess of investors (which, as the random walk hypothesis would have it, is often wrong).

Related to this idea of stock valuation seeming to be an overly arbitrary concept is the notion of necessary growth. From a financial performance perspective, there's income and profits for a given quarter or year (both important things), but tacked on to financial analysis driving stock buy or sell recommendations/decisions is growth. If a company made a bunch of profit on a bunch of income in a given quarter or year, that's nice and all, but how much growth over their profit or income from the last quarter or year?? You know, if not a big enough increase, then... Sell, Sell, Sell.

It's an interesting phenomenon, but seems to be the methodology chosen to run our largest (i.e. publicly traded) businesses. I wrote about this in a June 2010 blog post "A Loss of Control: Running (or Hoping to Run) a Public Company", but corporate executives are mandated by law to drive towards stock price increases... and it's just interesting that the speculation driving these sought after increases often driven heavily by quarter over quarter financial improvements or declines, even if a decline in quarter over quarter performance is within a larger context of solid financials.

In terms of this whole discussion and current events, Facebook today went from a platform used by some 901 million users as of March 2012 to a publicly traded company valued at at over $100B. Sounds a huge success as a company, but since the stock was priced to open at $38/share and closed the first trading day at #38.23/share, you get stories like the Associated Press report "Facebook falls flat in public debut." It's fascinating... the company was working on the same things at the end of the day as the beginning and I'm sure performed as a company (not a stock) much the same as on the prior day, but investors believing the shares were priced just about accurately at open means the company "fell flat." Yep, seems pretty darn ethereal as defined above.


To step back for a minute from the specific subject of stock valuation, me thinks there's also way too much etherealness (yep, it's a word) in the corporate work done at many of the public companies out there. Just as stock valuation can be a matter of (often wrong) perception, corporations can too frequently have their best employees identified on the basis of not terribly important indicators like "being busy." I touched on this phenomenon in the Sept 2010 post "Urgent vs Important Work", but so frequently time gets spent on things that don't really move the success or failure dial much (and this is even using the public company success/failure dial of income/profit).

It's not to say all corporations are filled entirely by employees doing busy work 100% of the time as some corporations (and employees) are going to be much more productive around things of import than others, but it is an interesting morass to try to avoid, both as a corporation and it's employees.

Corporate level success or failure at this busy work avoidance isn't going to change the stock increase chasing game, but is probably going to result in the companies that have employees focused on important rather than ethereal/urgent work performing better overall. Not a paradigm breaking statement to be sure, but important nonetheless.