Investments in stocks are becoming popular now more than ever. You’ve seen Shark Tank and read Elon Musk’s tweets about DogeCoin. You’ve also watched Scam 1992 and dreamt of making it big at the Bombay Stock Exchange. Research shows that 73% of Gen Z investors and 66% of millennial investors own stocks, making them the most common type of investment in this age group.
The GameStop stock price chaos proves that GenZ investors are a force to be reckoned with. But what happens when investments are made based on emotional, gut-driven decisions? What happens when an investor’s source of information is TikTok videos and a wacky billionaire’s Twitter feed? This kind of hype-based investing leads to the overvaluation of stocks.
What exactly is Overvaluation?
Overvalued stocks trade higher than their fair market value, i.e. the value that the company’s fundamentals, such as earnings or revenues, justify. An overvalued stock has a current price that is not warranted by its profit projections or price-earnings (P/E) ratio.
For example, let’s say MTTN is a company whose stock price is ₹1000 and earnings per share (net profit divided by the number of shares) is ₹20.
The calculation of its P/E ratio is determined by dividing the price by the earnings (1000/20 = 50). The stock is trading 50 times its earnings!
Now, if MTTN makes ₹100 in EPS, the new P/E ratio is (1000/100= 10) or 10 times. We would consider MTTN to be overvalued at a P/E of 50 but possibly undervalued at 10.
Note that there’s no single ‘good’ PE ratio because it’s a comparison tool, not a benchmark figure.
To put it simply, an overvalued stock means a security that isn’t worth what people are willing to pay for it.
How the Youth has positive and negative impacts on the valuation of Stocks:
The youth of today are keen on investing in the companies of tomorrow. Known for these individuals’ disruptive nature, most don’t understand what they get themselves into. For example—in stock markets, because of peer pressure and FOMO, these individuals will blindly follow any trend they see, most of which can be highly promoted through social media or high-profile business magnates. Zomato, in the stock market, and Dogecoin, in cryptocurrency, are some recent examples most of us would know. Here we will go into details about why there are positives and negatives of this.
India’s youth will have to ensure that its newfound obsession with cryptocurrencies and share markets should stay robust and intact, building a solid foundation within the system. Exchanges like CoinDCX, CoinSwitch Kuber, Zerodha Kite, Angel Broking App, etc., have created a frugal digital infrastructure to usher in a new stream of Gen Z and Millennials investors who are expected to contribute immensely over the next couple of decades. Known to be the dominant risk-takers, they won’t put their money in government or low-lying securities. This new generation is expected to opt for several digital currencies and take them to new heights.
In the case of share markets, the trust this new generation of Indians has in startups motivates these startups to do better. Similarly, with cryptocurrency, the hype millennials and gen z create helps the uneducated population know more about the benefits of these investments. Only 3.6% of India’s population uses a food delivery app compared to China’s 34% and the USA’s 31%. Zomato has a considerable chunk of this pie, and it is only expected to grow in the upcoming years. Paytm Money introduced a pre-IPO booking feature which found that 65% of pre-IPO orders for Zomato came from investors under the age of 32. 27% of the IPO’s applicants on Paytm Money on the first day of the launch were under 25. “With Zomato-like companies, unlike your usual stock investments, you are not paying for a share of earnings or its ability to compound in the foreseeable future. Instead, you’re paying for a slice of a fast-growing business in a growing consumer segment that you didn’t have access to in the listed space until now, in the hopes that the investor’s fancy for such new-age business models will hold up,” points out Bhavana Acharya – Cofounder of PrimeInvestor.
Given the exponential growth of the influencer industry across Instagram and other social media apps, the rapid interest of young investors with half-hearted knowledge in the stock and crypto markets, and the recent explosion of hype-based trading is overvaluing a company’s worth. For example, Zomato is valued at approximately 60,000 crores but according to experts, it has a valuation in the range of 39,000 crores. And to top it off, Zomato is a money-losing company with 3,000 crores of revenue in the last fiscal year. Zomato’s IPO was oversubscribed almost seven times by retail investors resulting in the overvaluation.
Rakesh Jhunjhunwala reportedly described the company’s stock as ‘tulipmania’. Tulipmania was a significant commodity bubble, which took place in the 17th century when Dutch investors began to purchase tulips at an alarming rate, pushing their prices to unprecedented highs.
In just eight months this year, 21 startups have already made it to the unicorn club. Over $20 Bn has been raised until July this year, with several funding rounds producing Indian unicorns in 2021. With most of them going public soon, one must wait and analyze that particular stock and carry out thorough research before hopping onto things . To avoid mistakes, we should take up the responsibility of educating ourselves first and not dive headfirst into something just because the crowd is doing it.
Financial literacy content on social media and new investment apps have enabled the Youth to take their finances into their own hands. While the crypto market is extremely volatile and risky, GenZ and Millenials are not deterred and keeps investing, resulting in Bitcoin hitting a trillion-dollar valuation. Danny Lee, a financial planner, said, “If you invest in crypto, think of it as dead money. The money you’ll never get back. At the end of the day, it’s going to be a speculative investment.”
Gen Z and Cryptocurrency:
Gen Z and Millennials make up nearly 94% of all crypto buyers. Quite a few young investors choose to have fun with their investments by buying meme coins and meme stocks. For example, Dogecoin, based on the ‘Doge’ meme, which portrays a Shiba Inu dog, now has a market valuation of over $22 billion! Many meme coins are entirely speculative, very risky, and sometimes fraudulent, but it can be difficult not to jump in on the opportunity to invest in them.
Financial literacy content on social media and new investment apps have enabled the Youth to take their finances into their own hands. While the crypto market is highly volatile and risky, GenZ and Millenials are not deterred and keeps investing, resulting in Bitcoin hitting a trillion-dollar valuation. Danny Lee, a financial planner, said, “If you invest in crypto, think of it as dead money. The money you’ll never get back. At the end of the day, it’s going to be a speculative investment.”
Bitcoin’s valuations have skyrocketed among the major cryptocurrencies, toppling even gold by a considerable margin, making it the number one choice for investments. This will lure millennials looking for quick returns on their investment and bring about a change in our government’s conventional thinking. The profit booking on crypto-assets has made it a fiercely competitive currency, and Gen Z and millennials have noted this.
After globalization, the world seems to be borderless, many trade barriers have been removed, and people have more faith now, the idea of capitalism facilitates the maximization of wealth. Investors globally and at the domestic level also are looking forward to investing in the Indian market. The market always looks at the future. In the long term, economic fundamentals propel the market. Thus, the financial markets in India will perform marvellously with more youth taking part in the coming years.
Written by Aditya Naik and Abha Deo for MTTN
Edited by Anushka Bhattacharyya for MTTN
Featured image via Google Images