Catch Stockholders’ Imaginations and
Their Investments Will Follow
The Imagination Premium™ Analysis
In a perennial source of dismay for executives at publicly held firms, investors all too often favor expectations of future growth over solid performance in the here and now. With a methodology based on research by Valize principals, we can help you understand the value the markets place what your company does. Even better, we can show you how to influence this value by investing in options for future growth.
“Imagination Premium™ - the extent to which investors are making a bet that your future is going to be bright.”
How does it work?
We have developed a technique for separating the portion of a company’s market capitalization that is attributable to cash flow from ongoing operations (Operations Expectations) from the portion that is explained by expectations of future value from growth (Growth Stake). By dividing the value attributed to growth by the value attributed to operations, we calculate the Imagination Premium™. This is a ratio which summarizes the extent to which investors are betting that the future will be bright. Companies that literally catch investors’ imaginations benefit from improved share prices.
Examples of the Imagination Premium™ Effect
Consider Amazon. Its Imagination Premium now is 292%. Fully two thirds of the company’s market capitalization consists of investor expectations for future growth, rather than their belief in strong existing cash flows.
The Imagination Premium effect can be confounding. In the automotive industry, there was a brief period in which Tesla (basically a money-losing startup) was valued more highly than Ford, despite Ford having generated $4.6 billion of actual profit in its most recent year. Tesla’s value is all Imagination Premium, with a growth stake of some $55 billion. The Tesla story also illustrates that too high an Imagination Premium can lead to price instability – anything that casts a shadow on the growth story can lead investors to flee (as happened when Volvo announced an aggressive move to abandon internal combustion engine cars). Too high an imagination premium can be difficult – with Elon Musk himself observing that he thought the stock price “is higher than we have the right to deserve." No surprise then that Volvo’s announcement led Tesla to lose some $10 billion in market capitalization in a matter of days.
Too low an Imagination Premium, however, and your firm can face investor wrath, activists, calls for the CEO to step down and so on. As an example of this phenomenon, consider Buffalo Wild Wings. Its Imagination Premium was a woeful (yikes) -60%. In their case, it is clear that investors not only don’t expect the company to grow, they actively believe that it will shrink. The CEO was shown the door and the Board is now trying to figure out a new growth story.
What’s your growth story?
To benefit from the lift a higher Imagination Premium can give your stock, our research shows that creating more option value – the benefit of taking small stakes in high-potential opportunities – can be extremely effective.
We’ve had decades of experience helping companies turn today’s options into tomorrow’s growth.
Email us today at Growth @ valize.com.