Mercovus Critiques the Internet
The internet is littered with valuation commentary. Sound valuation analysis is a little harder to find. In this newsletter, we give you a professional appraiser’s critique of some lay valuation opinions. We’re calling this segment Mercovus Critiques the Internet.
The first clip features Dan Patrick discussing whether the $9.6 billion purchase of the Seahawks is a good investment. The purchase is defended by the assertion that "prices are just going to keep going up." If this is the market perspective, it makes sports teams not unlike growth stocks: Their value is not driven primarily by the expected dividends to be received while held, but by the expected capital appreciation by the time of sale.
Under the income approach, as defined by the American Society of Appraisers (ASA), an asset's market value is dependent on the anticipated benefits from owning an asset. The reference to benefits, instead of cash flow, must have been deliberate. The measured benefits are typically cash flow, but with a sports team, one benefit may be years of enjoyment: We are not all about money in finance.
These sports teams have been selling for astronomical values. The Lakers recently sold for $10 billion and may now sell again for $12.5 billion. So you can have some fun, and then make some money when you are done!
The next clip considers NFTs. The commentator asserts that the proper valuation method involves calculating the total cash flow associated with an NFT over its lifetime and then multiplying that amount by 0.10 and 0.15.
Rules of thumb have their place in valuation. They can help you ballpark a number or sanity-check a result from another method - if they are good rules of thumb.
Normally, we do not value a stream of cash flows by summing the entire amount and applying a factor to that. We more often look at a single period, such as a year, and capitalize it. In real estate, for example, you might take next year’s expected net operating income from holding a property and divide that by a capitalization rate.
I assume we are discussing a copyright licensed from the NFT. That copyright could last 70 years. If license payments are growing at 4% per year, the proposed range would imply a discount rate of roughly 5%, which is about the risk-free rate today. License payments aren't typically risk-free, so I am not sure that the proposed formula makes sense.
The final clip argues that Q1 2026 earnings were artificially inflated by roughly 12% because of ASU 2016-01. Under this standard, companies measure the change in value of their venture investments and report related returns in the "other income" section of their income statement.
Retail investors often examine earnings per share, which is based on net income; this, in turn, is increased by other income. Appraisers often value businesses using EBIT or EBITDA—earnings before interest, taxes, depreciation, and amortization. But these metrics actually also measure earnings before other income and other expenses. So the acronym should probably be EBIOTDA.
When we measure earnings that way, they are not affected by other income and other expense. One could value the operating business using EBITDA and then add the value of the venture investment separately to the value of the operating business.
I hope you enjoyed reading this - let me know if anything surprised you!
Eric Sundheim, ASA
Principal
Mercovus Valuations
Comments