I know this is an apples and oranges comparison, but I just find it fascinating how value is derived in society.
The current stock price, Slack's market cap is half of Tesla's. And, a lot of people think that Tesla is overvalued.
The current stock price, Slack's market cap is half of Tesla's. And, a lot of people think that Tesla is overvalued.
Multiplying that stock price by the number of outstanding shares provides a number known as market capitalization, but it is not THE value that an organization provides to society.
Obviously, rational & efficient market behavior breaks down in reality. But tell me, how does it break down exactly? What alternative measurement of intrinsic value is better, and in what sense?
If you have special knowledge of what subjective / behavioral differences current trading patterns exhibit in contrast to rational or efficient behavior, then by all means share it, or make trading decisions with it, because it means you can measure / predict something pretty much no one else can.
But if you don’t have that special knowledge, then how exactly can you know the prevailing market prices are not actually reflecting intrinsic value?
The stock market exhibits massive changes without much new information except information about the actions of other investors. You can similarly believe something is basically worthless (e.g. crypto) and simultaneously believe the price will not go down in the next long while due to investor behavior. The opposite is especially true for non dividend stocks.
Consider the current state of the economy. People have lots of money with fewer places to put it. Lots of people just dump it into index funds. That means more shares of large companies are bought, which means the price of those shares is going to go up. This is happening as a fixed function based on total market cap. Did we really get any new information to believe that npv of future cash flows had gone up? Nah.
If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
Yes, and the “price” is not the expected net value of future cash flows, it’s an estimate of what people are going to pay for it. The price and the value are two distinct concepts.
> If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
I know that you’re taking a positive “well show me” kind of stance to imply that I don’t know the market better than the people actively involved in it. But I’m not claiming to know where prices should be. I’m claiming prices are driven by a variety of things, one of which is value, but much of which is just various unsubstantiated assumptions. Many of those assumptions could be entirely incorrect. That does not mean the market will realize this soon, or ever, so assuming that any particular world view of what’s incorrect will materialize in a price change isn’t the wisest decision.
For capital gains oriented growth tech stocks especially, significant money has been invested because of a simple lack of alternatives, which has inflated prices. Should those prices fall? Irrelevant question, because value is not the sole driver of price. Irrationality is a part of the system.
Dismissing something obvious and derived by a large-scale aggregation of views in favor of something contrarian and unsubstantiated is much more similar to religious arguments.
That should say everything you need to know
That's before compression.
"Cost of revenue consists primarily of expenses related to hosting Slack and providing ongoing customer support for paid customers. These expenses include employee compensation (including stock-based compensation) and other employee-related expenses for customer experience and technical operations staff, payments to outside service providers, third-party hosting costs, payment processing fees, and amortization expense associated with internally-developed and purchased technology. We expect our cost of revenue to continue to increase in absolute dollar amounts as we grow our business and revenue."
That amortization could be significant; it's likely that they're not spending $5 in hosting and devops alone. It may not be pennies, but it's way less than the cost of a car.
To service their order book, they just need a skeleton crew. And the order book should be the bottom line for the bulk of investors.
FANNG's market valuations are vastly larger than their knock down economic effects on the rest of the economy compared to GM/GE in the 1950's.
Never saw a Slack-Tesla or AOL-Exxon kind of mixture though.
So to the OP, yeah I totally agree. It's fascinating.
If a company lost $10 one year, $5 another, and broke even the third a guess of making money the fourth year is probably more reasonable than a guess of making the average, even with a marginal book value.
Therefore, I don’t think it’s that surprising that companies losing money are still worth a lot.
This isn’t always a reasonable way to think of things, though. It’s important to consider the actual realities of the business. For Slack, I think it’s largely fine. There really shouldn’t be a hard constraint preventing them from making shit tons of money.
Uber and Lyft are a different story. I have a hard time imagining a situation in which those companies will ever be profitable, even with self-driving cars, save one buying out the other.
I think that is what is going on with Uber. Their current core business will never earn enough to justify their valuations. Investors assume it will add new divisions and capabilities.
IMO the best justification for Slack's market value is that its likely to be acquired by one of the mega-cap tech companies in the relatively near future.
Alone it may not be a profitable business, but integrated into a broader ecosystem like AWS or Microsoft Office or Facebook's network, may result in extremely valuable synergies.