Here's Why Some Stocks Have Fallen So Far

Sometimes, stock performance shows that nobody knows what a company is worth. In this video clip from "The Morning Show" on Motley Fool Live, recorded on Feb. 14, Fool.com Director of Small Cap Research Bill Mann, advisor Jim Mueller, and analyst Sanmeet Deo answer a member's question about why Confluent (CFLT -0.14%) stock is trading down so much.

Bill Mann: Let's take a real-life, practical example right now and it comes in the form of the single most upvoted question today from Anthony Soprano. I need just stop for a second because that name is amazing. Well done you, why is Confluent stock falling so hard? Let's change our framing just a little bit. Confluent is currently down 16%. Earlier in the year, it was a $56 stock. Earlier this year, it was a $94 stock.

I think that we can agree that it is falling hard. It has revenue. It has a market cap of $15 billion and revenue of $387 million. If I do my math properly, it is trading at a price to sales in excess of 50. It also has traded, if you take it from July of this last year to today, the stock is up 50%. Sanmeet, why is the stock trading down so much?

Sanmeet Deo: Well...

Jim Mueller: Because you anchored on that high price. [laughs]

Mann: Well. You know what dude? You answered that perfectly. Well, I'll tell you why because nobody has any idea what Confluent is worth. Sanmeet by thinking a second and he was going to make up some nonsense. I can see how. [LAUGHTER] I can tell I threw you specifically under the bus because you have no answer. Frankly, I don't know what Confluent does. I read it. I still don't understand it. I'm exactly the wrong person to ask on a lot of levels, but I'm the exact right person to ask on the level that matters, which is, nobody knows how much this company is worth, which is why it is trading at 50 times sales. Fifty times sales is literally...

Mueller: Who was the CEO of Sun Microsystems?

Mann: Sun Microsystems.

Mueller: Sun Microsystems has a great article about that.

Mann: Yeah, Scott McNally?

Mueller: We have to find that. In the meantime, I put in the chat for the Slido Q the article I wrote about anchoring. Has a lot of what I talked about already, but there is a twist at the start. Go and read it.

Mann: Here it is Scott McNealy.

Mueller: Yeah.

Mann: At ten times revenues. Confluent is at 50. "To give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes, I pay no taxes, which is very hard and that assumes you pay no taxes on your dividends, which is kind of illegal. And, that assumes with zero R&D for the next 10 years, I can maintain the current level revenue run rate.

"Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency, you don't need any footnotes. What were you thinking?"

Now, Mr. McNealy gives a good quote but he's being awfully harsh because, at the same exact time that he was making this quote, Amazon.com (AMZN 3.20%) was trading at far higher multiples than Sun Microsystems was. This quote being from 2003?

Mueller: 2001.

Mann: Paid-off rather well. Oh my gosh, it's ten o'clock. My gosh, we've had fun. Mr. Soprano, don't show up to break my legs or anything [laughs]. All of this to say, when you are investing in companies that have really high multiples, you are betting on extreme outcomes. An extreme outcome is really hard for the market to be able to discount back to today.

Why is it falling so hard? It can't do anything else. It can't not fall really hard because every single penny of disappointment equals thousands of dollars in assumptions, millions of dollars of assumptions for where Confluent is going, and nobody really knows.