So overvalued now?
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The risk is unchanged or arguably reduced by the increase in share price. The potential reward however is not quite as sweet now as it was back at 15 cents :t_up:
I don’t think that makes owning Sky “the business” any riskier.
It certainly affects the kind of return you can expert to get on the investment though. If your average was $3/share when there were 389M shares outstanding then you were saying Sky was worth $1.167B.
You may have made an error in your valuation of the business (and can therefore expect your returns to suffer), but once you took a position your RISK did not change one iota just because the SP fell subsequently.
Let’s imagine you could buy all of the shares at the time based on $3/share ($1.167B).
A year later you speak to an investment banker to see if you can sell your business. The investment banker tells you that unfortunately the sentiment of “the market” has changed towards content aggregators the past year and if you sell it now you would be lucky to get half what you paid for it. Ouch!
Right now, you still own the entire business though and it still has the same commercial prospects as before.
Is your business now RISKIER than it was before you picked up the phone to call your investment banker?
The share price is a reflection of what the market thinks about a business. Sky's business was risky before, now it is less risky (and will continue to be less risky) as it opens up other sources of revenue in addition to satellite revenue (e.g. through Neon and broadband) and focuses on its 'bundle'. The share price reflects this.
I think that because the market couldn't see Sky transforming itself (previously), the result was that the share price fell from heights to $1.50 and less. Now that the business has taken steps and is beating targets in its transformation, the market (in my opinion) sees Sky's business (with the success it has had with its transformation) as less risky :).
In a world where Covid-19 is endemic, I know I'm going to be staying inside more to watch Neon and etc.
A share price significantly below what I deem to be fair value can imply two things. The first - I am right in my assessment and the market is acting irrationally for whatever reason. The second - I am wrong and/or other players have access to information that I do not and based on this have dumped the stock. This is where most of the added risk of this investment is to me. What am I not seeing? What have I missed that others have spotted?
Another thing to consider is capital raisings. Who enjoys being diluted at a price below what they consider fair value? Or raising debt? Hard to get good rates if everyone thinks your business is on the brink of failing. These are risks to my investment.
Yes, the SP is a reflection at any point in time about how the market ‘feels’ about a business. For most businesses the SP is a reasonably accurate reflection of the intrinsic value of the business…MOST of the time.
But the market can be overly optimistic and times and overly pessimistic at other times based on the consensus.
Completely separate to the view of the market every 15 minutes…is the underlying performance of the business. I would argue that your only real risk is either getting the analysis wrong in the first place (and therefore getting your valuation incorrect and paying too much) or some Black Swan event happening that you couldn’t predict and permanently diminishes the value of your business.
However the SP at any given time does not represent risk to you. It does represent market sentiment, but if your analysis of the business is correct then that pessimism can allow you to increase your returns without changing your risk at all.
A good example of market sentiment might be Xero, which punters adored but institutions disliked due to the business not making any money for most of the time it was on the NZX. But its SP simply took off, all the way to the moon, or should I say Australia, never to return :lol: