Category: Excerpts

There are good arguments to be made against investing in Zomato at is proposed offering price, but one of the emptiest, and laziest, is that it is losing money right now.

I know that for some value investors, trained to believe that anything that trades at more than 10 or 15 times earnings or at well above book value, this argument suffices, but given how badly this has served them over the last two decades, they should revisit the argument.  

The biggest reason that Zomato is losing money is because it is a young company that is trying to take advantage of a market with immense growth potential, not because it cannot make money. In fact, if Zomato cut back on customer acquisitions and platform investments, my guess is that it could show an accounting profit, but if it did so, it would be worth a fraction of what it is today. 

–Prof Aswath Damodaran

Source: Graham & Doddsville

Probably our best ideas over the past ten or 12 years have been ideas that looked cheap and which actually ensnared a lot of value investors.

The investors didn’t realize that these businesses were deteriorating faster than their ability to generate cash.

Eastman Kodak was a great example of that. A few famous value investors were buying it all the way down because they assumed that the decline in the business would be a slow glide that would allow the company to harvest cash flows for the benefit of shareholders.

The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs.

In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model.

They ended up being decimated by their own invention of digital photography.

When analyzing Kodak as a short candidate, valuation was almost the last aspect that we considered because,as I said, some of the best short ideas can look cheap from a valuation standpoint.

Source: Aswath Damodaran

Source: Journal of Behavioral Addictions