The Valuation and the Timeline 

 

From time to time I come across articles focusing on the value of a brand, and sometimes the subject of stock price is brought into the equation. In one way or another, authors use the stock price of a particular company to gage the value of the brand, which this company represents. After having engaged in one of such discussions, I decided to summarize some of my views on brand value versus stock price in this shot post.

I can agree that stock market can be a good indication of the value of a given brand in any given moment of time. Perhaps, it is the timeline that makes the market capitalization, or the value of the company stock, and the value of the brand equate or deviate. Let me qualify this statement. Things happen in real time, as we know, – “for every action there is a reaction”. Some events can be game changing for a public company and its stock, and some are simply little dots on a long-term time line.  The latter can dramatically affect the stock price at a given short time period, but will not affect the true long-term value of the brand. The former, on the other hand may affect both.

However, although the tendency of stock markets is to be forward looking, they cannot predict the valuation accurately at any given moment. Usually the markets do not extend their forecasting powers to a period of more than six months, or so. Such short-term focus creates a conflict with true life-longeconomic value of a brand, and, therefore, cannot be used as a determinant of a true market price of that brand. In addition to economic, geopolitical and other factors at play, stock markets are also driven by emotions or sentiment. Fear and grid can be and often are some of the most prominent drivers of a stock price. There is a good reason why often enough acquisitions happen at a significant premium to a given stock price at the time of that acquisition. These are exact cases that show the deviation between the current stock price and the brand value.

Fear and Greed Effect

Fear and greed effect cases a lot of short-term fluctuations in the value of the market capitalization. No matter what schoolbooks tell us, the markets are not fully efficient. The moments of extreme stress show that inefficiency, which often caused by the emotional response of the market participants to one or another market or exogenous force.

Swings in the value are usually exacerbated by the emotional response, which drives that value to a greater extent in the direction of the market force. If, for example, a stock price is correcting due to a worse than expected news release, chances are, it will correct significantly more than would be warranted by the news. This is happening because some of the participants are disposing of their positions in a rush creating additional volume and a downward pressure on the price. The opposite is happening should the news release be better then expected.

These examples simply show that the correlation between the stock price (market capitalization) and the value of the brand are not always perfectly correlated. Sometimes they deviate dramatically. Those are the cases for a good arbitrage opportunity, but that is more about trading strategy than the brand value.

Public versus Private

In the case when the company or brand is not a public entity, public markets do not play significant role in its valuation besides providing comparables. The good thing about this fact is that short-term fluctuations in the value are not visible and the emotional factors do not affect the value in as a significant way. I would argue that the values of privately held brands are more in tune with their market valuations. However, perhaps, I will discuss this subject another time.