WSJ: Roubini -- Twitter Value "Ridiculous."

By SIMON CONSTABLE

Valuations among tech startups are looking frothy, and that includes Wall Street darling Twitter Inc., according to the man known as Dr. Doom.

“Tech is a bit ridiculous in terms of the deals being done,” said Nouriel Roubini, founder of Roubini Global Economics. He was speaking with The Wall Street Journal at the World Economic Forum in Davos. “Startups with barely any profits are selling for sixty times expected forward earnings.”

He also said there were some examples of firms with no revenue selling for huge sums.
“Take Twitter,” he said. “Based on current revenue and earnings the valuation is totally ridiculous.”

It’s not that Roubini doesn’t like Twitter. Quite the contrary, he “loves” it and uses it multiple times every day.

The problem, as he sees it, is how the company can build a “revenue base” to justify the value.
It’s a useful tool, he says, but he doesn’t see the company growing bigger than Facebook Inc. or Google Inc.

It’s not just Twitter that has a crazy value, he says, pointing to some companies with zero revenue being acquired based purely on their “option value.” Or put in more simple terms, the purchase price is based on the small chance that one day the company builds a successful and profitable business.

Famously, close to two years ago Facebook purchased Instagram, which had zero revenue at the time, for $1 billion in cash and stock.

He also pointed to “flops” in the startup space, naming Groupon as an example of the risks inherent in the space.


To be sure, there are some “amazing” tech firms” and “some will be successful,” he said. Just not all of them.

See original story here.

WSJ: What Is 'Alpha' in Investing?

By SIMON CONSTABLE

When you pick portfolio managers, you need to know how good they are at their job—or put another way, how much alpha they add.

If you could have done just as well buying an index-tracking investment—such as the SPDR S&P 500 exchange-traded fund for broad U.S.-stock exposure—your portfolio manager isn't adding any alpha. If the manager does better than just tracking the market benchmark, then he or she is adding alpha.Alpha, the first letter of the Greek alphabet, in this context means the positive difference someone makes in the investment process, says Art Hogan, chief investment strategist at Lazard Capital Markets in Boston. An investment manager who adds a lot of alpha is "a good stock picker or sector picker," he says.

Alpha only goes so far, though. "When you add alpha it's a relative term," says Mr. Hogan. For instance, if you owned gold stocks and the gold sector plummeted like it did recently, your alpha might be that you lost less money than other investors.

Also, don't confuse alpha with beta, another term taken from the Greek alphabet. In this conversation, beta refers to how stocks move relative to the overall market. A stock with a beta of 1 moves in sync with the market.

See original story here.