Read This First: A Better Basis for Building Stock Market Value
United States stock exchanges list ~4,200 public companies. Most of those businesses have so-called mid-cap or lower valuations. Many - well over a thousand, even the large-cap stocks - regularly trade below their cash and/or book value.
While sometimes this is because performance is weak or inconsistent, often the stocks of these businesses trade out of sync with actual results, good or bad, and/or the way the companies operate.
As the copy on various pages of this site suggests, Sinter sources the root of this problem to a disconnect between the way technology has changed the capital markets and the ways businesses explain how they make money.
Confusing Business Performance with Business Models
More simply put, Boards, management teams and even advisors today confuse business performance with business models.
Performance is disclosed and marketed - if badly (see just below). Business models are generally ignored, obscured deep in regulatory filings, or assumed to be well understood.
The Risky Timelessness of Investor Marketing
Most companies disclose/market results the same way in 2024 as they did in 1974. Technology has transformed sales, business, markets and regulation, but so-called “investor relations” remains largely frozen in time.
Specifically, the vast majority of public-company IR consists of press releases, audio conference calls, sell-side coverage and occasional conferences - just like it did 50-plus years ago.
This combination no longer works very well, for reasons we’ll explore elsewhere on this blog. And as stated, even this activity focuses on promoting results, vs. an understanding of the system, resources and strategy that produce the results.
While this is mainly a public-company issue, this resistance to innovation with respect to how financial audiences discover and act on relevant business information starts when companies are still private.
How We Define a Business Model
We define a “business model” as a repeatable system that allows a company to commercialize a product/service, at scale, better than competitors. Early in a company’s lifecycle, especially if it raises funds, this kind of system often gets promoted, at least to potential investors, alongside whatever the company actually sells to customers.
The model and associated unit economics - even if they aren’t fully realized - are key to investor and sometimes to partner/customer confidence. In part, this is because brand new companies and management teams aren’t yet proven. When that is the case, it’s the business model, not the business itself, that helps raise money and define competitive moats, not to mention informing product roadmaps.
Business Models’ Inverse Relationship with Investor Knowledge
But with growth and scaling, the visibility and discoverability of business models usually fades into the background, in favor of performance and products. A simple Google search for most private companies will confirm that their products/services are far more visible than any discussion of how they makes money. (There are notable exceptions to this, like Stripe.)
This means that, as business models get more complex and successful, stakeholder understanding of what drives that success often declines. This marks the start of most companies’ problematic separation of value from performance. It’s also the core of Sinter’s client work.
To be clear: the customer/product relationship must be top priority in a for-profit business. But the less the commercial system supporting that relationship is understood, the bigger a risk a business creates for itself.
If no one outside the company understands how a business actually works? Expectations for that business will, sooner or later, create costly problems - since in fact it is expectations as much as results that set the pace for how business value is defined and created. This is particularly true once businesses become public companies.
Highly Innovative Companies; Highly Traditional IR
Despite this, many of the most disruptive, innovative and groundbreaking companies that go public adopt the most mundane, traditional and limited approaches to IR.
Investor relations is the only corporate function dedicated to explaining financial performance externally, an activity that, inherently, should mean the relentless, creative and real-time marketing of a business model. Yet quite frequently, the function is relegated to reactive, repetition of dated results, using outdated distribution mechanisms, just a few times a year.
The Limits of Traditional IR
This is a mistake. It’s actually difficult for the average public company to consistently persuade markets that future performance will be superior to current or past performance, regardless of a given quarter’s actual performance. Quarterly results and traditional IR alone rarely maintain that kind of valuation resilience.
Why? Because doing so depends on alignment of the way daily equity markets trading actually functions with institutional investor support; retail investor understanding; financials; sell-side analysis; and customer/sector authority.
This alignment can happen mostly organically around a truly extraordinary business model (Google’s), long-term strategy (Nvidia), or management team with almost flawless execution (Netflix).
But for most public companies, especially smaller ones, optimizing - and then maintaining - alignment across trading, valuation, performance and investor dynamics requires modern marketing tools and techniques, awareness of those tools, and the mindset and focus to actually use them in a capital markets context.
Herd Instinct = Lost Opportunity
Remarkably, while this option exists for any business, instead, thousands of public companies gamely issue dozens of releases a year that go largely unread; invest hundreds of hours on earnings scripts aimed at humans who no longer make daily trading decisions; and compete for analysts too few in number to ever meet coverage demand, whose recommendations also fail to correlate consistently with investor behavior and valuations.
And most private companies - unburdened by capital markets concerns - overlook the chance to build deep, valuable understanding of their models as well as their products, even when they have greater freedom to explain, promote and advocate for the way their businesses function and compete.
There’s a better way.
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