Audit Notes: Twitter math, guard labor, M&A and oligopoly

Newsweek and stock valuations

This is an odd little Newsweek item on “Twitter’s Dicey 2013.”

Newsweek notes that Twitter’s fourth-quarter earnings disappointed investors, who sent its shares down about a fifth, and tries to put its sky-high valuation in layman’s terms:

The company reported a huge loss of $511 million, but excluding onetime stock costs associated with its IPO Twitter made a modest profit of $10 million. That’s small potatoes compared to its stock market value, which is in the neighborhood of $27 billion. If profits stay where they are, it would take nearly 700 years to pay back an investment in Twitter stock from company earnings.

It’s a little strange that Newsweek never mentions that it’s talking about the P/E ratio, perhaps the most basic valuation metric in the stock market. Any chance to educate people about the basics is nice.

But this is just wrong:

And tech wizards like Google represent the high end of valuations. A more typical payback rate would be around 10 years.

The average P/E ratio for an S&P 500 company as of the end of January was 17.8. The historical mean is about 15.

The New York Times runs a fascinating and disturbing op-ed that reports on the correlation between inequality and “guard labor,” which the authors define as security guards, cops, and military, etc.:

It could be that people with a strong commitment to economic justice are, for some unknown reason, also more law-abiding, explaining the difference between Denmark and the United States. But the correlation evident in the graph could be evidence that economic disparities push nations to devote more of their productive capacity to guarding people and property. Fear and distrust of one’s neighbors and fellow citizens fuel the demand for guard labor. Economic disparities can contribute to both. Among the countries shown, a common measure of distrust of strangers is strongly correlated with both the guard-labor fraction and inequality.

Social spending, also, is strongly and inversely correlated with guard labor across the nations shown in the graph. There is a simple economic lesson here: A nation whose policies result in substantial inequalities may end up spending more on guns and getting less butter as a result.

I’m in Denmark for the year, and I have to say I rarely ever see cops or security guards. The murder rate, by the way, is about one-fifth of what it is in the States—even after the collapse in American homicide over the last 20-plus years.

— Quartz catches Goldman Sachs in a Kinsley gaffe with these quotes from an analyst’s report talking up the benefits of industry consolidation:

“M&A that drives an industry toward oligopoly is the good kind.”

“An oligopolistic market structure can turn a cut-throat commodity industry into a highly profitable one. Oligopolistic markets are powerful because they simultaneously satisfy multiple critical components of sustainable competitive advantage—a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.”

Comcast, anyone?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,