Pay billions for 'eyeballs'? Absurd

STORY HIGHLIGHTS

Editor's note: Brian Hamilton is the chairman and co-founder of Sageworks, a financial information company that provides analysis and solutions for privately held companies.

(CNN) -- Recently, investors celebrated the birthday of the current bull market, which turned five years old. On this anniversary, it's worth reflecting on how valuations, particularly of technology companies, are being calculated.

On Thursday, the Wall Street Journal reported that Airbnb, a travel rental company, which has not released information about its revenue or profitability, may be approaching a valuation of $10 billion. Other startups in the IPO pipeline include a number of unprofitable companies like Box and Square, with rumored valuations in the billions.

Have billion-dollar or multibillion-dollar valuations become the norm? Is it all about hype and greed nowadays? Whatever happened to the wisdom of investors like Warren Buffet who evaluated companies based on their profits and fundamental performances?

Brian Hamilton

The value of any company is a function of the cash flow it will generate in the future. A healthy cash flow allows a company to repay its shareholders and initial investors who, understandably, expect their investment to be eventually reimbursed.

Ordinary investors who rely on the hype surrounding a company rather than the company's fundamentals may make decisions that they regret later on. Just ask anyone who invested in the Pets.com IPO about the danger of falling for overvalued companies.

Granted, everyone in the tech industry -- from startup founders to venture capitalists -- is eager to find and bet on the next big thing. Still, the money being thrown around is mind-boggling.

Facebook WhatsApp deal

Silicon Valley gold rush

Even a decent business model and the potential for growth do not justify a multibillion-dollar valuation. Yet, Facebook recently offered an astounding $19 billion to buy WhatsApp, a popular messaging service. Though WhatsApp has reportedly been able to turn a small profit, this overblown acquisition price is higher than the market cap of 275 companies in the S&P 500.

Some market watchers have argued, as Michael Wolf did on CNN.com, that the WhatsApp acquisition is indicative of a fundamental shift, and that traditional "old world" methods of determining valuation have been replaced by "new world" metrics.

For example, Wolf cited Facebook's acquisition of WhatsApp at $42 per user, which is in line with price-per-user acquisitions of companies like YouTube, Tumblr and Instagram. This is one way of looking at things, but it's severely flawed.

The value of a customer is in the revenue the customer provides, not in his or her mere existence.

If we look at the price-per-user metric without evaluating revenue per customer, the analysis becomes eerily similar to the late 1990s, during the dotcom boom when, for example, number of "eyeballs" was a metric used to evaluate technology companies.

Counting "eyeballs" or "user base" or "potential" only works in a bull market when market momentum can make poor decisions seem wise. Perhaps we remember the NASDAQ's high of 5048.62, during the height of the tech boom, and not when it fell to 1114.11 in 2002 when the tech bubble burst.

But bull markets do not last forever, and it's important to make sure we're evaluating companies based on their long-term value, regardless of market cycle.

Of course, not all overvalued companies are "bad" companies. Twitter, for example, has a sizable user base, solid revenue growth and an undeniably disruptive and innovative technology. It's safe to say that Twitter has a lot of potential. However, the company's valuation is simply not justified by its fundamental performance. Twitter's stock is trading at nearly 45 times its 2013 revenue, and its profit multiple (a company's market value expressed in terms of its earnings) is nonexistent, given that it has yet to establish a profitable business model.

Sure, there are some companies, like Amazon, that don't meet traditional metrics of financial strength that end up performing incredibly well in the stock market. But they are the exception, not the rule.

Consider the example of Vonage, one of the hottest IPOs of 2006. Despite losing 97 cents of every dollar in sales, the company had a $2.6 billion valuation. The company's fundamentals did not match its valuation. The results speak for themselves, with Vonage shares currently trading at $4.53, down from their $17.00 IPO price.

We are forced to accede to the most logical and rational valuation methods; otherwise, there is no structure to making investment decisions. For every Amazon, there are several Vonages.

Despite what some market watchers say, the "old world" method of valuing companies is still the best way of valuing companies.

I suppose it's true that Christopher Columbus made a great discovery by sailing the wrong way around the earth trying to find India. Here is a case where somebody happened upon great success based on incorrect data and methods. However, investors placing their bets on tech companies without basic fundamentals are more likely to resemble Ponce de Leon: map-less and looking hopelessly for the Fountain of Youth.

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The opinions expressed in this commentary are solely those of Brian Hamilton.

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Published on: 9:56 PM

$$ FOR JOB TRAINING? Obama proposes billions more despite spotty record

Despite spotty evidence that the billions of dollars spent on dozens of federal job training programs are delivering results, President Obama is proposing to spend billions more as part of his $4 trillion budget plan. 

On the federal level, the government already spends about $18 billion a year to provide multiple services to unemployed workers on everything from career counseling to job training and searching. About half that money goes to Labor Department programs.

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The White House, in pitching additional funding, is touting the efforts as a way to "equip" workers with the skills employers need, at a time when the unemployment rate is falling but not quickly enough.

"We know that while not all of today's good jobs are going to require a four-year college degree, more and more of them are going to require some form of higher education or specialized training. So this budget expands apprenticeships to connect more ready-to-work Americans with ready-to-be-filled jobs," Obama said in unveiling his budget on Tuesday. 

But a look back shows that despite the president's push to retrain unemployed workers or create new government-backed jobs, the efforts have netted less-than-stellar results.

"Based on the track record the government has, it's counterproductive to spend federal dollars on these programs," Daniel Mitchell, a senior fellow at the Cato Institute, told FoxNews.com.

In 2003, the government spent $13 billion on training and employment services. By 2009, that number had jumped to $18 billion, according to the Government Accountability Office.

Today, nearly 50 federal programs deliver job training and related employment services.

In the latest budget proposal Obama sent Congress, the government would invest more than $3 billion in formula grants to states and localities for the more than 20 million Americans at 2,500 American Job Centers across the country.

Another $1.5 billion in 2015 would go toward a four-year $6 billion Community College Job-Driven Training Fund, which offers competitive grants to partnerships of community colleges, public and nonprofit training entities and industry groups.

But throwing billions at multiple programs hasn't worked so far, Mitchell claims -- faulting in part a lack of transparency.

Many job training programs don't monitor if participants end up finding long-term employment based on what they learned through the program. Of those that do, the data is unreliable at best.

For its part, the Obama administration says it is exploring ways to streamline access, more fully engage employers to ensure that training is well-matched to jobs, and improve efficiency. But others are skeptical.

A recent report by the Government Accountability Office found that there is "substantial overlap" among the programs and that "little is known about the effectiveness of employment and training programs we identified."

"That is remarkable -- taxpayers have been funding these sorts of programs since the 1960s, yet federal auditors still aren't sure whether or not they actually work," said the 2011 report "Employment and Training Programs: Ineffective and Unneeded" by Cato's Daniel Murphy and Chris Edwards. 

Murphy and Edwards argue that various studies conclude that while "some programs may provide modest benefits," others "show no positive effects."

A 2008 impact study looking at the Workforce Investment Act -- which provides funding for job training and related services -- found that the benefits to unemployed workers participating in the programs were small or nonexistent.

In 1996, the GAO also noted that "little is known about the (the program's) long-term effects on participants' earnings and employment rates." The analysis found "no statistically significant improvement in wages over the long term from participation in JPTA training programs."

A decade earlier, the same conclusion was reached by the National Research Council regarding federal job training programs for youth.

The feds aren't the only ones with a questionable track record on job training programs. In Connecticut, the Republican-American recently reported that a program meant to help unemployed veterans has helped just about 100 find work over the course of two years. Far fewer were hired before the program was expanded -- the program was designed to give employers subsidies for hiring and training veterans.

Raffi Williams, a spokesman with the Republican National Committee, told FoxNews.com that the money the federal government is throwing at jobs training programs should be spent elsewhere. 

"For the past five years, to the detriment of our country, the president has favored failing big government  programs instead of proven job-creating policies, like building the Keystone XL Pipeline," Williams said. "The result, predictably, has been a stagnant economy, greater debt, and more burdens for future generations." 

Instead, some say the real impact on jobs training programs could take place in the private sector. Mitchell said businesses are better-equipped to handle training and job searches within a company or sector.

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Published on: 11:42 PM

$$ FOR JOB TRAINING? Obama proposes billions more despite spotty record

Despite spotty evidence that the billions of dollars spent on dozens of federal job training programs are delivering results, President Obama is proposing to spend billions more as part of his $4 trillion budget plan. 

On the federal level, the government already spends about $18 billion a year to provide multiple services to unemployed workers on everything from career counseling to job training and searching. About half that money goes to Labor Department programs.

ADVERTISEMENT

The White House, in pitching additional funding, is touting the efforts as a way to "equip" workers with the skills employers need, at a time when the unemployment rate is falling but not quickly enough.

"We know that while not all of today's good jobs are going to require a four-year college degree, more and more of them are going to require some form of higher education or specialized training. So this budget expands apprenticeships to connect more ready-to-work Americans with ready-to-be-filled jobs," Obama said in unveiling his budget on Tuesday. 

But a look back shows that despite the president's push to retrain unemployed workers or create new government-backed jobs, the efforts have netted less-than-stellar results.

"Based on the track record the government has, it's counterproductive to spend federal dollars on these programs," Daniel Mitchell, a senior fellow at the Cato Institute, told FoxNews.com.

In 2003, the government spent $13 billion on training and employment services. By 2009, that number had jumped to $18 billion, according to the Government Accountability Office.

Today, nearly 50 federal programs deliver job training and related employment services.

In the latest budget proposal Obama sent Congress, the government would invest more than $3 billion in formula grants to states and localities for the more than 20 million Americans at 2,500 American Job Centers across the country.

Another $1.5 billion in 2015 would go toward a four-year $6 billion Community College Job-Driven Training Fund, which offers competitive grants to partnerships of community colleges, public and nonprofit training entities and industry groups.

But throwing billions at multiple programs hasn't worked so far, Mitchell claims -- faulting in part a lack of transparency.

Many job training programs don't monitor if participants end up finding long-term employment based on what they learned through the program. Of those that do, the data is unreliable at best.

For its part, the Obama administration says it is exploring ways to streamline access, more fully engage employers to ensure that training is well-matched to jobs, and improve efficiency. But others are skeptical.

A recent report by the Government Accountability Office found that there is "substantial overlap" among the programs and that "little is known about the effectiveness of employment and training programs we identified."

"That is remarkable -- taxpayers have been funding these sorts of programs since the 1960s, yet federal auditors still aren't sure whether or not they actually work," said the 2011 report "Employment and Training Programs: Ineffective and Unneeded" by Cato's Daniel Murphy and Chris Edwards. 

Murphy and Edwards argue that various studies conclude that while "some programs may provide modest benefits," others "show no positive effects."

A 2008 impact study looking at the Workforce Investment Act -- which provides funding for job training and related services -- found that the benefits to unemployed workers participating in the programs were small or nonexistent.

In 1996, the GAO also noted that "little is known about the (the program's) long-term effects on participants' earnings and employment rates." The analysis found "no statistically significant improvement in wages over the long term from participation in JPTA training programs."

A decade earlier, the same conclusion was reached by the National Research Council regarding federal job training programs for youth.

The feds aren't the only ones with a questionable track record on job training programs. In Connecticut, the Republican-American recently reported that a program meant to help unemployed veterans has helped just about 100 find work over the course of two years. Far fewer were hired before the program was expanded -- the program was designed to give employers subsidies for hiring and training veterans.

Raffi Williams, a spokesman with the Republican National Committee, told FoxNews.com that the money the federal government is throwing at jobs training programs should be spent elsewhere. 

"For the past five years, to the detriment of our country, the president has favored failing big government  programs instead of proven job-creating policies, like building the Keystone XL Pipeline," Williams said. "The result, predictably, has been a stagnant economy, greater debt, and more burdens for future generations." 

Instead, some say the real impact on jobs training programs could take place in the private sector. Mitchell said businesses are better-equipped to handle training and job searches within a company or sector.

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Published on: 6:34 PM