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'All about price and nothing about valuation'

Myles Udland
·Anchor
·4 min read
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Tuesday, February 9, 2021

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The GameStop drama is winding down. Goldman Sachs considers what we’ve learned.

It’s been less than two weeks since the craziest days of the GameStop (GME) saga.

But in markets years, it feels like a lifetime ago.

And so as we move past this strange event and shares of GameStop and other meme stocks start to level out in daily trading, Wall Street strategists are looking back at what we might’ve learned from the entire episode.

In its efforts to make sense of this drama, Goldman Sachs’ equity strategy team led by David Kostin turns to the words of Oscar Wilde — “In Lady Windermere’s Fan, one character asks, ‘What is a cynic?’ The friend responds, ‘A man who knows the price of everything, and the value of nothing.’”

For fundamental analysts like those covering specific industries or sectors or asset classes at a major Wall Street firm, valuations are a North Star.

As we’ve written previously in the Morning Brief, what goes into a valuation is far from a settled science.

Factors like overall economic growth, interest rates, profit margins, growth levers, competitive pressures, and so on all combine to generate what is argued as a “fair value” for some stock or other asset. Much of the investment industry’s energy is spent debating what this “fair value” might be and why an asset trades above or below this estimated level.

In the case of GameStop, however, Kostin and his team note the perhaps obvious truth that there was no fundamental justification for the stock to go from $60 to $120 to $240 to $360 to $480 per share and back down again in just a few sessions.

As the firm writes, “The entire episode was all about price, and nothing about valuation. Social media commentary typically referenced price action with lofty targets sometimes illustrated with rocket ship emojis. We almost never read a comment about valuation because the rally implied an astronomical P/E multiple.”

Jack Davenport as Lord Darlington and Joely Richardson as Lady Windermere star in the Oscar Wilde play, "Lady Windermere's Fan," staged at London's Theatre Royal. (Photo by rune hellestad/Corbis via Getty Images)
Jack Davenport as Lord Darlington and Joely Richardson as Lady Windermere star in the Oscar Wilde play, "Lady Windermere's Fan," staged at London's Theatre Royal. (Photo by rune hellestad/Corbis via Getty Images)

That any stock could get caught up in a Reddit-fueled belief that small-time traders had unlocked some secret to pushing around the market should perhaps not be such a surprise. Because if there is one asset that captures the investing zeitgeist today it is Bitcoin.

And much of the Wall Street community struggles to understand Bitcoin precisely because there are no traditional fundamental value metrics driving the price higher — what drives the value of Bitcoin is the price of Bitcoin.

These higher Bitcoin prices attract additional interest from ever-larger market participants; companies, for instance, now allocate a part of their balance sheet to Bitcoin.

And while to assert that there is no traditional fundamental value metrics underwriting Bitcoin’s rise will certainly rankle some — on-chain transactions and daily volume of Bitcoin traded are just some of what crypto analysts will see as fundamental drivers — it is the absence of factors such as P/E ratios or operating margins that seem to present Wall Street analysts with such a challenge in understanding Bitcoin.

And that these same factors seemed absent from the GameStop story poses a similar challenge.

“We could be wrong and in Wilde’s terminology be sentimentalists clinging to a nostalgic belief that valuation always matters,” Goldman writes. “Stated alternatively, perhaps we are only seeing the absurd recent valuation and not recognizing the potential future market price of the shares.”

Perhaps.

Or perhaps the GameStop story isn’t really meant to be understood through any of these traditional fundamental lenses. Perhaps the GameStop story is best understood as one in which the logic of higher prices solidifying demand is moving from the world of crypto and into the world of public equities.

And what a change that would be.

By Myles Udland, a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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