Price and value are two different things – just ask Canva investors

Welcome to the first Montgomery Investment Management newsletter published from LinkedIn focusing on the Montgomery team’s latest thinking on market issues, stocks we like and education on investing themes.

In this article Roger Montgomery reviews the difference between price and value. With the share prices of many tech stocks having cratered in recent months, there are perhaps few more opportune times than now to revisit the important difference.

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PRICE AND VALUE ARE TWO DIFFERENT THINGS – JUST ASK CANVA INVESTORS

With the share prices of tech stocks having cratered in recent months, there are perhaps few more opportune times than now to revisit the important difference between?Price?and?Value. It may surprise investors that every business has a real worth or a true value that may bear no resemblance to the currently traded price.

Witness for example, the recent news that U.S. investment giant Franklin Templeton, T. Rowe Price and Capital Group have slashed the value of their stake in unlisted graphic design platform provider Canva. With operating revenues of US$1 billion, institutional funds had tipped money into the tech ‘unicorn’ valuing the business at US$40 billion in September 2021.

With listed tech companies like Zoom Video falling 81 per cent from recent highs, and with Pinterest down 77 per cent, Lyft 77 per cent off its high and Netflix, Facebook (Meta) and Amazon also down, it makes perfect sense that private equity investors face the reality of falling market prices.

As an aside, many investors including Australia’s Future Fund have invested heavily in private equity funds, and directly, encouraged by the fallacy that the less frequent marking-to-market of valuations would enable them to post better performance numbers than their pure equity or bond market peers.

Interest rates act like gravity

The reality however is rising interest rates act like gravity on the value of all assets. The fall in the value of listed businesses should not be unique to listed entities. Just because a group of people sit around a room and agree on a valuation at which they will tip money into an unlisted business does not mean that is the value of that business.

And so we arrive at the point where an explanation of the difference in price and value is required.

What is any asset worth? What is a plot of land worth? What is a business worth or a share a company? Any asset, what is it worth?

You will have often heard the axiom “It’s worth what someone will pay for it”, or ‘It’s worth what you can get for it.”

That axiom is in fact incorrect. Price is what someone will pay. Value or worth, is something entirely different.

In the 2009 Berkshire Hathaway Annual Report, Warren Buffett wrote; “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get’.”

Price and value are two different things

At an auction for a property that sells at an insane or unexpected price, observers will grumble; “It’s not worth that!”

We intrinsically understand that value and price are two different things.

Is the tech company Canva, generating one billion US dollars of revenue, worth US$40 billion? Of course not. Few businesses, if any, are worth 40 times revenue. Forty billion US dollars was what someone was prepared to pay but that price is not what Canva is worth.......

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