ATIS_Market_Roundup_-_Issue_7

ATIS Market Roundup: Issue 7
(21/02/15)

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Welcome to the seventh issue of the ATIS Market Roundup Newsletter.
A number of events held in the past fortnight. Last Tuesday had our Advanced Fundamental Analysis, the day after EY were
on campus with free coffee along with Deutsche Bank holding their Speed-Networking event the same day. On the Friday we
held our Mock Assessment Centre via our Platinum Sponsors FactSet, and the Monday after the Executive Editor of The
Economist came in to deliver a talk on the World in 2015. We didn’t stop there though, as the Chief Exec of Nottingham
Forest FC came in on the Wednesday, and on the Friday we held our first Trading event, giving members demo accounts for
trading and letting them trade for a couple hours to really experience what it’s like to trade. Congratulations to the winners of
that event: Trading Officer Joel & his partner Matthew; made £500 profit in 2 hours of trading with £10,000. For those that
were coming to the MasterClass on Presentation Skills we have had to reschedule it, and will keep you updated regarding
that
Here are a selection of events coming up in the next fortnight. Full details including every event are on our Facebook page
• Technical Analysis: Advanced
• Deutsche Bank insight into Investment Banking
• Trading Room: Part 2
• George Feiger: Executive Dean of Aston Business School
Aston Business School have the following events coming up
• 25 Feb 17:30 – 19:30 Aston Business Network
This is a great way to meet local business people and network. Each event will begin with a short talk on a topical business
issue from one of our experts, followed by the opportunity to make new business connections and network with Aston staff
and alumni.
http://www.aston.ac.uk/aston-business-school/events/aston-business-network-feb/
(One thing we recommend everyone read up on, as well as what we’ve written, about is cyber-security, and Kaspersky’s
recent findings)
Oliver Ward
Contents

3,6 Premier League TV deal
$5bn rights for the next few years
7,10 HSBC
Swiss money laundering
11,12 Optiver
We Q&A the Team Lead Recruitment
13,14 Tesla
Year end profits
15,16 ‘Cable’ & UK Unemployment
An example of Tuesday 24th’s Technical
Analysis
17,20 Grexit
Why banks are fearful
21,24 Private Tech Market Valuations
We explore billion dollar startups
1 2
Oliver Ward
President,
is a second year BSc Business &
Management student, focusing on
Economics & Analytics for year 2.
Along with being President of ATIS, he
is a Director of the World’s largest
University based consultancy, and the
General Secretary of the Aston
University Badminton Team, along with
being a very keen badminton player
himself. His strengths lie very much in
sales, strategy, and growth, and he
wishes to pursue this as a career path.
Joel Ntamirira
Trading Officer,
is a second year student studying BSc
Honours Finance. As well as being
Trading Officer with the Aston Trading
and Investment Society, Joel is Utilities
and Healthcare Portfolio Manager with
Aston Capital. His equity investment
philosophy is concentrated, research
driven, focused on value and growth
ideas. He wishes to pursue a career in
equity research & investment
management.
Anil Somani
Vice Trading Officer,
is a second year student studying BSc
Economics & Management. Prior to
joining Aston University, Anil was a full
time trader for three years and returned
over 300% making him one of IG’s top
500 clients, specialising in derivatives;
trading equity index futures,
commodities, forex, and a few select
US stocks. Anil specialises in technical
analysis and believes risk management
is the key to being a successful trader.
Sharandas Thampi
Contributing Writer,
is an MSc Business and Management
student at Aston Business School, with a
keen interest in the Investment
Management and Strategy Consulting
industries. He holds an undergraduate first
class honours degree in engineering and
has 2 years of part-time and full time
entrepreneurial leadership and
management experience, leading a start-up
team of engineers in the internet industry in
India. His interests include financial
markets/trading, business analysis and
technology.

The Barclays Premier League
In the second week of February, news broke that Sky and BT had together agreed a
television broadcasting deal worth a little more than GBP 5 billion. Sky paid 4.2 billion
for 5 out of 7 available packages, while BT, one of Sky’s primary competitors splashed
out 960 million for the remaining 2 packages.
The deal numbers only serve to enhance the position of the English Premier League as
the world’s most lucrative football league, borne out by the data below:
What does the deal mean for the broadcasting companies, the clubs and fans all
over the globe?
The Broadcasting companies:

With the current broadcasting contract worth approximately GBP 3 billion and analysts
predicting GBP 4 billion for this one, ultimately the contract exceeded all expectations.
Sky in particular has had its bid increased by 83% compared to the previous deal. Sky,
part-owned by Rupert Murdoch’s 21 Century Fox, has stated that it plans to cut
internal costs in order to decrease the burden of the new contract on the end viewers
at home. The company’s business model consists of offering premium viewing
packages across ﬁelds, including sport. BT’s copying of this model along with
successfully bidding for rights to broadcast the highly lucrative UEFA Champions
League has led to Sky upping the ante in order to maintain its competitive position.
Analysts have predicted that such massive increases in the cost base for Sky could
create long term unsustainability for the company, and probably already has, unless it is
able to leverage the deal to increase its revenues from viewers as well.
BT, one of the oldest telecommunications companies in the world, will pay out GBP
320 million per season to telecast 42 matches per season, as opposed to 246 million
at present.
The Clubs:

Here’s an interesting statistic: All 20 premier league teams rank amongst the 40 richest
teams in the world (as per espnfc.com) on the previous deal. Burnley is richer than
Ajax. With the new deal being worth almost 70% higher, the pockets of the clubs and
their players are set to be lined with even more cash. As the news of the deal broke,
Manchester United shares, listed on the NYSE grew 5% on positive reaction to the
news of increased revenues for the club.
Add to this the possibility of the world’s best players migrating from the Spanish, Italian,
German and French leagues to England and there is a very real chance of the Premier
League taking complete dominance over all European competition, which may not go
down well with global heavyweight football clubs such as Real Madrid and Barcelona in
Spain, Paris St. Germain in France or Bayern Munich in Germany. An additional
possible fall-out could be the intense scrutiny that the PL would come under, unless
clubs use part of the increased revenues for purposes such as youth development and
sporting infrastructure development.
3 4

The Fans:

As the chief executive of any football club would tell you, the club’s greatest source of
revenues are from its passionate and highly devoted set of fans. Ranging across actual
match tickets, hospitality packages, stadium tours, merchandise and video
subscriptions, there is a variety of ways in which the club makes maximum use of the
paying fan. Safeguarding the interest of fans is thus vitally important from a strategic
point of view for the club. There is a wide-ranging call from people and pundits alike to
slash match ticket prices in order to reduce the burden on the fans. Arsenal currently
has the most expensive season ticket and adult match day ticket at £2013 and £97
respectively.
There are a set of analysts that are of view that a slash in ticket prices will not happen,
as the clubs will use the additional revenue to re-invest in more players, higher wages,
better stadiums and better academies
The Players

Will be thrilled. However the La Liga President, Javier Tebas, has expressed his
concerns. He believes Barcelona and Real Madrid's top players could move to
England after the Premier League's new television rights deal, following the cross-
border moves of Alexis Sanchez and Mesut Ozil in recent years. Their manager, Mr
Arsene Wenger, said the "impressive" value of the new contract "will contribute to get
the best players all over the world to come to England”. He added: "The movement of
the players is always linked with the economical and financial power in the countries”.
"When I was a coach in Monaco we bought the English players because we were the
first to have the television money. Today, the biggest financial power is in England and
the best players come to England”. This is hugely evident in today’s world. Take the
Columbian striker Radamel Falcao, who plays for Monaco. He’s currently on loan in
the Premier League making £350,000 a week with Manchester United. Money talks.
"We have a serious problem. We won't be the best league in a year," Tebas said.
"We're going to lose a lot of value in the market because the Premier League is going
to snap up all of the global TV competition and contracts.”
The game is awash with money, and it may not be long until players are on £500,000
a week contracts. Money talks. Bring on the financial powerhouses of the Premier
League.
5 6

HSBC Leaked Files
HSBC could be hit by fresh legal action in the UK and
the US after the leak of secret files that showed the
UK’s second largest bank engaging in widespread tax
avoidance at its Swiss operation.
The scandal raises the risk of criminal investigation in
Britain. The US Department of Justice could also revisit
a deferred prosecution agreement over money
laundering allegations. Meanwhile Mr Falciani has
teamed up with the far left Spanish party Podemos to
advise them on tax policy.
Briefly, what’s happened?
A vast amount of files have been leaked for clients of
HSBC’s private bank between 2005-2007, and they
have been handed to a group of international news
organisations. In total, the amount of files leaked is
over 60,000, some of which detail how the bank knew
of tax avoidance behaviour and wrongdoing by some
clients. The total amount in these bank accounts is
over $100bn. As a result, there is an outcry amongst
people to figure out why, if these files have been held
by Government’s for more than half a decade, with little
action.
So why hasn’t much been done by Her Majesty’s?
The Americans, French, Belgians and Argentines are all
doing it. So why do the British authorities seem
apprehensive to formally investigate HSBC’s Swiss
private bank? They’ve known about this for a while
now, so the outcry is understandable. Well, this is
becoming a tough question for Downing Street to
answer.
One key to understanding why the Brits appear to be
going easy on HSBC dates back to a multibillion
pound deal over tax evasion Switzerland signed with
us in 2011. In it, the Swiss state tried to insist its banks
would be immune from prosecution. The Swiss settled
for a commitment that it would be “highly unlikely” that
their banks would be subjected to a criminal
investigation regarding tax evasion - although the
agreement did not apply to money laundering, which
this is. The Swiss tried to get an agreement saying they
would be completely immune as well: Mario Tuor, a
spokesman for Switzerland’s State Secretariat for
International Financial Matters in Bern, said however
“The British said it was not possible”.
Another thing to get around is that the leaked data,
originally taken from HSBC in 2007 by Mr Falciani, was
shared between the French and UK governments in
2010. Paris did so under strict conditions that
prevented HMRC from sharing it with other law
enforcement agencies. However David Gauke, the UK
Treasury minister responsible for tax matters, said this
week that this obstacle was being demolished, telling
MPs: “The French authorities have today confirmed
that they will provide all assistance necessary to allow
HMRC to exploit the data to its fullest.”
After the recent publication of the leaked data, there is
a renewed focus on the Swiss/UK deal and the officials
who negotiated it. Richard Murphy, a tax campaigner,
said the Swiss deal gave HSBC “virtually guaranteed
immunity from prosecution”. It seems then as if Mario
Tuor has got his way, just not written in stone…
With both HSBC and the UK government facing
growing questions about the tax-dodging affair that
exploded into public view this week, the pressure is
mounting on British authorities to match other
countries by launching a formal investigation.
So what have the authorities done about it then?
Several authorities have been allowed access to the
files, and as mentioned earlier some countries such as
France or Belgium have taken legal action. In the UK,
HMRC has found out around £135m in tax has not
been handed over. That’s enough to cover every single
Aston University’s student fee, both Postgraduate and
Undergraduate, for a year and a half. It’s also enough
to buy a lot of cookies.
The revealed practices
Are clever, if you want a word for it. HSBC’s swiss
private bank provided large, untraceable ‘bricks’ of
cash in foreign currencies to clients of it’s Swiss bank,
and colluded with them to hide black accounts from
tax authorities. Codenames included ‘Captain Kirk’ and
‘Painter’, and these were used to disguise the names
of the bank accounts to their clients. The bank also
provided it’s clients with credit cards to enable them to
make withdrawals from Swiss bank accounts at cash
points outside the UK.
HSBC’s reaction
Immediately after it was announced, their share price
fell. Feb 9 it was ~610p, Feb 11 ~592p, a 3% drop.
They also released a statement soon after, saying
many private banks at the time including it’s own Swiss
operation had a number of clients that may not have
been fully compliant with their applicable tax
obligations. The bank said “We are acknowledgeable
and accountable for past compliance and control
failures”. The bank added “We have taken significant
steps over the past several years to implement reforms
and remove clients who do not meet new HSBC
standards. They noted how their private bank client
base had shrunk 70%, and said they have
implemented numerous initiatives designed to prevent
it’s banking services being used to evade taxes or
launder money.
7 8

Geneva Raid
We won’t stop there though as things just went from bad to worse for these guys.
Swiss authorities are searching the bank's Geneva premises over these allegations. A
spokesperson for the prosecutor said it was looking for “everything and anything we
can find”, and Swiss public prosecutors in the country have said they are probing
HSBC Private Bank on allegations of money laundering as well as investigating
"unknown individuals”. The investigation could be extended to people "suspected of
or having committed, or participated in acts of money laundering" prosecutors Olivier
Jornot and Yves Beertossa said in a statement. The search of the bank's offices in
Geneva are "ongoing", they added.
HSBC declined to comment on this occasion.
So my local bank are likely to break the bank in terms of legal costs due to the bank
of files available to trawl through. We will have to see whether the Government will
bank the £135m owed to them, but we will certainly be sure to bank on the fact
HSBC will not wish to be against legal action. Again. (Cue ATIS Market Roundup
Issue 3 FX scandals)
9 10

Optiver Interview
We Q&A the Team Lead of Recruitment, Lianne
Middeldorp
OW: For those that are unaware, could you please
give an outline as to who Optiver are, your
history, and what you do 
LM: We are Optiver, an international trading company,
headquartered in Amsterdam. With more than
700 colleagues across four continents we
constantly offer fair and highly competitive prices
for the buying and selling of stocks, bonds,
options, futures, ETF’s et cetera. It is what we
call ‘market making’. We build markets and
provide liquidity to international exchanges in
Europe, the US and Asia Pacific.
OW: Where does Optiver position themselves in the
Market and how do you differentiate yourselves
against your competitors?

LM: We are a market maker, constantly aiming to
provide liquidity to the market. In comparison
with some other market makers we have a broad
scope of the products and markets we trade
internationally.
OW: What keeps Optiver ticking, what inspires the
company to keep going?

LM: Innovation. Every day is a new day for
improvement. It’s something that connects our
people to a common goal.
OW: What have been some of the major
achievements in the 25 year history of the
company?

LM: Optiver moved successfully as one of the first
trading firms from pit trading to screen-based
trading. Also Optiver did not have a loss making
year since the year of its foundation in 1986.
OW: What are the major job divisions available at
Optiver and what do they entail?

LM: We want to be the best trading firm in the world.
Therefore we are always looking for the best
traders in the world. But since trading on the
floor changed to screen-based trading, we also
constantly need the most advanced technology,
trading software and connections to the market.
In short, we need the best IT-professionals there
are to develop, optimise and support our tools,
To service our trading and IT-colleagues the best
we can, we definitely need great ‘facilitators’ in
our business operations department.
OW: Optiver currently only has 3 offices:
Amsterdam, Chicago, and Sydney. Why is this,
and are you looking to expand any time soon,
say, into the UK?

LM: With three strategic locations we are able to
trade all major markets around the globe in every
time zone. There are no plans to open an office
in the UK.
OW: How different is it to work in these 3 different
offices?

LM: Although the roles are pretty similar, there are
always small differences in products and
markets. For this reason we encourage people to
share knowledge and offer our employees
transfer possibilities to one of our offices abroad.
OW: How useful is someone’s degree for a job in
Optiver?

LM: We look at your study background, but that is
not the most important to us. It is a combination
of study background, motivation and relevant
experience gained throughout your studies and
life.
OW: What was your history before joining Optiver,
why did you decide to apply to Optiver, and
what made the company stand out for you,
personally?

LM: My personal background is in Economics &
Politics. When I was a board member at my
Finance Society at university I had to organise an
in-house day for Optiver and that is when I first
learned about the company. I was amazed by
the culture – people work hard within a fast-
paced, dynamic environment, but at the end of
the day at the drinks reception people were so
friendly and relaxed. After 4 years, I still have that
same feeling about Optiver.
OW: What is like to work at Optiver? What is the
general culture?

LM: We aim to be unrivalled in our industry, by being
talented, creative and result-driven. And it
doesn’t matter how you dress or what you
believe in, as long as we exceed our own and
each other’s expectations.
OW: If you were to advise any applicants applying
to Optiver what would you suggest?

LM: Focus on your motivation! Often people send in
just a random letter of motivation, while we find it
really important why you actually want to work at
Optiver and/or within trading. In addition,
preparation is key. Know what you are applying
for and prepare well.
OW: Describe Optiver in one word

LM: For this I need three words: ‘Value the Difference’
ATIS would like to thoroughly thank Lianne for her time
and wish her and Optiver the best in the future.
11 12

Tesla
On Thursday 12th of February, Tesla Motors (TSLA),
the electric car maker based in Palo Alto, California,
announced that a loss of $0.13 per share on account
of production issues, deliveries falling short and a
stronger dollar. This reverse was in the context of
analysts predicting a 31% increase in profits. The
charismatic CEO of Tesla, Elon Musk, followed up the
damning earnings announcement with a shocking
claim that Tesla could be worth almost $700 billion
(Apple’s approximate current valuation) by 2025.
Is Tesla beginning to lose steam in the highly price-
competitive global automobile industry, or will the
cult company rise to become a global behemoth?

Currently Tesla sells just one car, the Model S. At
$70,000, the model is in the high-end luxury bracket.
Upcoming models include the Model X, an SUV style
vehicle scheduled to be released in early 2016, as well
as the Model III, a relatively low-cost vehicle aimed at
establishing Tesla as more of a mainstream brand.
The Model S and the Model X
Earnings Discussion

Spokespeople for Tesla said that deliveries of the Tesla
Model S all-wheel-drive version had been held back
after its release in November ’14 in order to “meet
customer expectations of the model”. Though
production was made up during December (as per the
Detroit Free Press), around 1,400 vehicles were not
delivered in December alone. A dollar that has been on
the rise through the second half of 2014 into the first
quarter of 2015 has also resulted in less-than-
impressive results.
Though the Securities and Exchange Commission
(SEC) stipulates that listed companies must follow the
standard Generally Accepted Accounting Policies
(GAAP), Tesla reports on a non-GAAP basis. This has
resulted in being able to display lower losses than
might actually exist. While the reported non-GAAP loss
was $42.3 million, the GAAP loss is a much higher
$107.6 million. The share price of TSLA also dipped on
the breaking of the announcement on the 12th, as
shown in the chart below.
The sale of its upcoming Model X and the later Model
III will need to break all expectations in order to reach
the CEO’s lofty target.
The CEO statement

Elon Musk, CEO of Tesla Motors, saw the earnings
announcement as just a blip on the way to possibly
attaining the same valuation in the next 10 years as
Apple’s current $700 billion. Assumptions to this
hypothesis are a 50% increase in sale YoY for the next
10 years and a 10% profit margin. This would mean
that closer to the target Apple valuation, at a 50% YoY
growth rate, Tesla would have to be selling millions of
cars every year.
Tesla’s links to Apple seem to be growing consistently.
Apart from the fundamental similarities of combining
sound technology with great design, the premium and
even aspirational positioning of the product line and the
personalities of the respective CEOs, there are rumours
floating around that there is an increasing movement of
the workforce to and fro between Apple and Tesla. The
rumours continue to hold that Tesla is looking to
acquire the design capabilities of Apple for its models
and that Apple is planning on diversifying into cars.
Check that latter wild rumour out here. If this were true,
Tesla could be facing massive competition in the future.
Conclusion

The result as to whether Tesla will slow down over time
due to the pressures of current economic conditions
and the competitive nature of the auto industry or
whether it rises from its present $27 billion valuation to
the Musk’s prediction of $700 billion by 2025 is
contingent on the company being able to ramp up its
sales for the coming cheaper models, maintaining
profit margins at the targeted 10% and all the while
maintaining its level of innovation. Failing this massive
challenge would mean another over-hyped under-
performing Silicon Valley entity. Successfully mounting
this challenge could see Tesla become one of the
world’s strongest brands. It is too early to tell either
way.
13 14

Unemployment
UK unemployment data for the final quarter of 2014 showed positive signs that the UK
economy is continuing to strengthen. Unemployment has fallen to 1.86 million, whilst
the unemployment rate fell to 5.7%, beating analyst expectations of 5.8%. The positive
news caused a spike higher in the GBP/USD (also known as ‘Cable’).
Employment rose by 103,000 in the last quarter of 2014, driving up the employment
rate to 73.2%, which is the highest employment figure since records began, showing
signs of a healthy labour market.
Wages increased 2.1%
during the quarter, and as
inflation is currently around
0.5% levels (as measured by
CPI), this means that with
inflation currently at the
lowest levels since records
began, wages are finally rising
faster than inflation. This is a
welcoming sign for British
consumers as their purchasing power has increased.
However, although the low inflation is helping to raise real income levels for the time
being, UK consumers should remain cautious and take this as an opportunity to either
stock up on relatively cheaper goods. Signs suggest that inflation will likely rise in future
as with the Eurozone still suffering badly (in particular the Greek bailout crisis), the
economic recovery may be showing positive signs in the UK but the eurozone is still full
of uncertainty.
BOE Minutes

Another reason for the rise in the British Pound was the latest minutes from the Bank of
England’s Monetary Policy Committee, which highlighted a more ‘hawkish’ tone by the
Bank’s policymakers. Although all nine members of the committee voted to keep rates
unchanged at 0.5%, some members agreed that interest rates could rise later in the
year and this was one of the reasons for the rise in the UK currency in today’s trading.
The Pound bounces off master support

Anil’s GBP/USD (cable) forecasts: Looking at the charts on the right, cable bounced off
the master support level 1.50 at the start of this year, below that we have 1.48 which
were the lows seen in early 2013. My bias is bullish as long as these two levels hold,
and as the markets start to speculate on rate increases during the year, I will be
expecting the pound to strengthen. As the Fed in the US may also look to raise rates
within 6-9 months, the gbp/eur is a safer long considering the eurozone crisis and
remains a buy on dips.
These charts are a taster of Anil’s technical analysis, and they will be explained further
with more detail in his technical analysis presentation on Tuesday 24th Feb along with
many more charts and some live technical analysis!
60 pip move up caused by the
UK unemployment data at
9:30am. Data was better than
analyst expectations.
60 pip move up caused by the
FOMC Minutes at 7pm. Fed
said that they will not be
raising interest rates yet which
is bearish for USD, hence the
rise in GBP/USD.
15 16

Grexit
After the Germans refused Greece’s request for their loan extension programme at
Thursday lunchtime, it’s becoming ever more likely Greece will default on their
payments which may lead to a Greek exit of the Eurozone, a “Grexit”. Whether you
personally think Greece should or shouldn't be in the Eurozone, banks have a lot to
fear. Here’s why:
1. Greek banks are still very reliant upon the ECB for their funding

Greek banks need the ECB to buy their debt. As the chart below (from UBS) shows,
their reliance on ECB funding is less than it was, but still important. In December 2014,
for example, the ECB bought €56bn of Greek debt, up from €45bn in November.
Greek banks can also borrow through the European Liquidity Assistance Programme
(ELA). In theory, they could continue doing this even if Greek exits the euro. However,
UBS points out that the ELA needs to be approved by the ECB, so it can’t be taken for
granted.
In summary: If Greece exits the euro, Greek banks are very likely to default upon their
debt repayments.
2. The Greek government has a very big lump of debt to refinance this year

It’s not just Greek banks that need to refinance their debt, the Greek government needs
to do much the same. UBS estimates that the Greek state needs to finance
around €17bn of debt in 2015. It predicts that the problems will hit in July and August
when around €7bn debt bought by the ECB needs to be repaid. Without a new
European/IMF deal, UBS says Greece is unlikely to be able to raise this money from the
markets.
In summary: There is a risk that the Greek government and Greek banks will collectively
default on their obligations.
3. British banks are fairly exposed to the Greek state, Greek banks, Greek
companies and Greek individuals

If the Greek government or Greek banks default on their debt, the banks that lent
money to them will be hurt.
As the chart on the next page shows, from Bernstein Research, shows HSBC has by
far the largest exposure to Greek debt of any UK bank. Moreover, HSBC is very
exposed to the Greek ‘sovereign’ (government). If Greece doesn’t repay its debts,
HSBC risks losing up to $7.3bn, or 4.5% of its net tangible assets. However, Bernstein
points out that things may not be as bad as they look - the most recently available
figures for HSBC are currently from 2013, and the bank has probably cut its Greek
exposure in the past year (if their heads have been screwed on at least).
17 18

In summary: If Greek entities are unable to repay their debts, HSBC’s share price
will almost certainly fall.
4. European banks are also fairly exposed to Greek banks, companies and
individuals. Especially le français

French banks also stand to lose a lot of money if Greece can’t repay its debts.
Bernstein points out that Credit Agricole in particular has huge exposure to the
Greek market. In 2013, 12.6% of Credit Agricole’s net asset value was tied up in
Greece (all of it owed by the Greek private sector). By comparison, just 3.2% if BNP
Paribas’ net assets were exposed to Greece and just 0.8% of SocGen’s were.
5. Following a Greek exit, banking stocks are likely to be incredibly volatile

If Greece exits the Eurozone, UBS strategists predict that investors will panic and
put their money into ‘defensive’ and ‘low risk’ stocks. As shown by the chart below,
these include food, pharmaceuticals and general retail. By comparison, banking
stocks are considered high risk and would almost certainly suffer.
In summary: Banking stocks could plummet if Greek exits the eurozone and
defaults on its debt.
But here’s the good news!

UBS’s analysts suggest that the UK stock market as a whole could beneﬁt
(comparatively). This is because the UK and Switzerland are seen as ‘safe havens’
for money when there are wobbles in the eurozone. Germany is a comparative safe
haven too. By comparison, the stock markets of Spain. Ireland, Portugal and Italy
are all more correlated with events in Greece and will suffer more acutely.
In summary: UK banks have most to fear from a Grexit. The UK as a whole will still
suffer, but less so.
19 20

21 22
The State of Private Market Valuations - Technology
Investors appetite for new private tech companies is at a level unseen since the start of the new millennium. As we all know, that time it
didn’t end so well, but it seems times have changed and although valuations are mind-blowingly high, they might be justified; lets
explore.
A report by Ernst & Young shows that venture capital investment hit the highest level since 2000 last year, with $86.7 billion invested across 6,507 deals. This is
up from $53.5 billion invested across 6,551 deals in 2013. Venture capitalists across the board are beginning to closely eye the ‘hot’ private tech market; Fred
Destin, a partner at VC firm Accel Partners recently had an interview at CNBC where he said “we’re seeing the market overheat”. His rationale stems from the
surge in capital for Silicon Valley start-ups from venture capitalists, hedge funds and other institutional investors who are in essence ‘pricing up’ the valuations of
these early stage tech companies.
The disrupters stemming from Silicon Valley in this day and age have a much better platform for the creation of wealth and value than in the late 90’s and they
tend to be much later in the process prior to joining the public markets. In comparison to the late 90’s when startups with no-revenues had sky-high valuations; in
today’s market the valuations seem excessive and ludicrous in many cases, but somewhat more justifiable given the potential of some companies and their
current growth trajectory.
Lets examine Uber and AirBnB. These are the two largest “share economy” companies. Their growth has been almost exponential which has excited investors,
hence their frothy valuations. These two cases in particular highlight investor confidence in their service offerings and their growth potential. Lets look at some
numbers:
• Uber’s 2015 net revenue is rumoured to be over $2 billion. The firm operates in 250 cities in over 50 countries. The company has raised nearly $5 billion
in capital since inception in 2009, and is valued at $40 billion, with an IPO expected this year.
• AirBnB has over 975,000 listings (from 120,000 in 2012) in over 200 countries. The company has raised around $800 million since inception; and annual
revenues are rumoured around $500 million for 2014. The company is valued at $13 billion, making it more valuable than Hyatt Hotels, which is valued at
$8.9 billion. 11 million people have booked stays in 34,000 cities using AirBnB.
In both cases, the growth potential is huge and they have inferior direct competition. There is plenty of value to be unlocked for Uber & AirBnB as they consolidate
services in a fragmented industry. Among examining other factors, you could certainly make the case that their valuations are justified. On the other side of the
spectrum we have companies such as Dropbox, Snapchat and Pinterest, where the valuations seem to be priced by pockets full of exuberance.
- Dropbox is valued at an estimated $10 billion with an estimated 2013 top line of $200 million; assuming they double this in 2014. The firm has over 200
million users including 4 million businesses.
- Snapchat is valued at 16 - 19 billion dollars with no revenues and over 100 million monthly users.
- Pinterest’s is currently raising $500 million at a $11 billion valuation according to The Wall Street Journal. The company only started generating revenues in
2014; expected to make $500 million in revenues by 2016.
The difference between these companies (Snapchat & Pinterest in particular) and the two above is that AirBnB & Uber have a solid revenue generating business
model. There is no doubt Pinterest and Snapchat have potential, but their monetisation models have yet to be tested.
Moving on to valuation figures; it is always difficult determining the intrinsic value of any company, but I would say this phrase is an understatement particularly in
the high growth tech industry. We can only speculate what the figures are for private companies as their financial accounts aren’t publicly disclosed; so lets look
at recent IPO’s for high growth tech companies. The consensus P/E, EV/EBITDA e.t.c. metrics will deter investment from any reasonable money manager (mostly
because most of the companies have $0 in earnings and are in fact making losses). The most popular valuation metric in the valley seems to be the P/S (Price/
Sales) ratio; which completely ignores earnings or losses. Even by these standards the dear valuations aren’t easy to comprehend. Twitter IPO’d with a valuation
of $12.8 billion and a P/S ratio of 28.6 at that price. On the first trading day, shares rose over 70%, and the valuation was stretched to 53.3 on a P/S basis. Even
today the company is valued at 62 times the earnings expected in December 2016 (based on Yahoo Finance figures) and 21 times ttm revenue; commanding a
market cap of $31 billion.

It seems public market investors have bought in to the valuing these companies in multiples of revenues; which has in turn prioritised the companies search for
top line growth amongst other KPI’s. Twitter’s latest quarterly report (HERE) is focused solely on revenues, reach (MAU’s - Monthly Active Users) and
engagement (timeline views/MAU). Their closest referral to proﬁtability is their adjusted EBITDA ﬁgure which includes an expense of $177 million related to
stock based compensation. The actual net loss for Q4’14 was $125 million, and the adjusted EBITDA for the period showing a positive $141 million.
One of the main problems with billion dollar start-ups is not just that private investors are overpaying, but there would be less upside for public investors if the
companies have an IPO. High valuation’s pre-IPO undermines the potential for solid returns post IPO returns, essentially leaving less room for the public to
make money; which could dampen investor demand for the offerings particularly if this becomes a trend.
Although the text isn’t conclusive, it is important to note that analysing valuations is more art than science. The value of something is what someone is willing
to pay for it, and investors are happily parting with billions for good growth potential. As it stands the valuations seem rich, but not unbearable particularly if
history is our best guide. However, it is important to take caution otherwise you may end up at the wrong end of the cycle; until then, as Citigroup’s former
CEO Chuck Prince would say “as long as the music is playing, you have to get up and dance".
23 24

“Team work makes the dream work”
To contact the editors responsible for the ATIS Market Roundup:
Joel Ntamirira ntamirjl@aston.ac.uk,
Anil Somani somania@aston.ac.uk
Oliver Ward wardos@aston.ac.uk
Sharan Thampi sharanthampi@gmail.com

ATIS_Market_Roundup_-_Issue_7

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