Comment by dcolkitt | Hacker News Reader

Comment by dcolkitt | Hacker News Reader

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Exactly. Here's a very intuitive way to think about it.

Disney World's revenue has currently fallen by 100% this period. How much do you think the fair market value of Disney World should decline by? Clearly the answer is much less than 100%. Even if Disney World stays closed for two years, it's clearly a very valuable asset. As an asset it probably has a 50 year effective life, so 2 years of closing represents no more than a 4% loss in cash flow. Interest rates are essentially zero, so Disney World should be no more than 5-6% less valuable than it was before the pandemic.

The biggest risk for corporate assets isn't the direct impact of the lockdown. It's whether the experience leads to any permanent changes in people's behavior. If there's a permanent cultural shift where people stop going on vacation or visiting crowded amusement parks, then Disney World might be worth much less. But this is significantly more speculative than estimating the direct impact of the lockdown.

I assume you're ignoring the discount rate entirely for simplicity? It doesn't seem like money ten years from now should be worth the same as money today.

But I guess that implies that interest rates should go up eventually.

No, I think the OP addresses that obliquely here:

> Interest rates are essentially zero

Interest Rates for very secure debt is essentially zero, but future corporate profit expectations are uncertain, so there would be some non-zero risk premium applied in the rate used for determining their present value.

>The biggest risk for corporate assets isn't the direct impact of the lockdown. It's whether the experience leads to any permanent changes in people's behavior.

Note that this is a risk for specific corporate assets, but less so for corporate assets as a whole. The things people are shifting their spending to generate offsetting profits in other companies; if we're buying electronics instead of airfare, this is good for electronics manufacturers and distributors and bad for airlines. If we own both, then this shift matters a lot less.

This makes a lot of sense but then shouldn't this apply to stocks like Netflix or Peloton. That once the people get back to work and gyms, these companies will struggle to grow as fast and in a way face permanent damage till the next pandemic?

No, it doesn’t work the same way because investors will already take this into account when modeling the future cash streams available. They will say, “in year X we expected the business to obtain $FOO cash flow due to increased usage during a pandemic stay-home order. But this anomalous usage doesn’t mean the company “lost” any growth if it’s numbers aren’t as strong later, instead we expect it to have $BAR cash flow in normal times.”

In other words, temporarily gaining more revenue in a way that does not jeopardize the regularly predicted revenue in other times will not create a “permanent” lack of growth, under any reasonable model of discounted net present value.

The only way it could have an effect like that is if it put some type of limitation or burden that reduced capacity for business later.

For example, consider a toilet paper company instead of Netflix. Everyone rushes to buy tons of toilet paper right now, which looks like amazing revenue growth, but investors will ask if everyone is going to have the same demand later. Eventually there will be an issue between the supply chain to make that much toilet paper and the stored up stockpiles of people who don’t need to buy more. Some companies could go bust during that event, others might have cash reserves or other lines of business, and the effect on stock price will be related to these.

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