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Comment by tomalpha | Hacker News Reader

But shares do have an inherent value. Owning them gives you a right to a share of the profits. You own a share of the company. You can vote on who you choose to run it - i.e. the board of Directors.

Now many companies recently have chosen not to distribute profits - e.g. Amazon reinvests everything back into growth.

And there are types of share that don’t give you a vote on who runs the company (or your tiny ownership percentage makes it meaningless).

And there are companies that don’t make any profits so there’s nothing to share out!

But shares, at least classically, do have an inherent value.

Edit: Examples of these classic shares are “Dividend stocks” [0], but even with say TSLA or AMZN when you buy a share you’re buying the right to a share of the future profits.

[0] https://www.investopedia.com/dividend-stocks-4689744

Edit2: Now of course that inherent value might be zero if the company will never make a profit…

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I understand what a dividend stock is I even mentioned these two concepts in my other post. But condescension aside now we are getting somewhere. So people are speculating on future earning and think profits will grow exponentially. But none of these companies are projecting profits in short or long term and I don't ever see talk of profits from people who are buying these stocks. Functionally it all seems to run on emotions.

Yeah it's strange that the market cares so little about profits, and it runs much on emotions, but that still doesn't make it "wrong" in any way, in my point of view, as a ponzi scheme would. Progress is still being made, and revenue as well.

By the way, I hope you didn't find my tone condescending because I made such simplistic examples, just trying to be helpful, but probably mostly helping myself understand by typing it out :)

Maybe Ponzi scheme is too loaded a term but both have the same failure mode. At some point people will wise up and demand some real returns. It might not collapse but it will stop growing and there will be a knock on effect as so much of it is taken on leverage.

"Wising up" is just the stock price going down. Happens all the time. Dividends are also paid regularly, which is real money in the investors pocket.

Both Tesla and Amazon have never payed out a dividend even though they have had profitable quarters. Plenty other companies have never even had a profitable quarter. Yet the stock price keeps going up.

For most tech companies the value is in the number of users rather than profits. High numbers of repeat users, coupled with growth in the number of users, suggests that the company is on to something.

There is demand for these stocks in part due to the possibility of future profits through the monetization of these users. As well as the possibility of the company being acquired by a larger company (whereby exiting shareholders can sell their shares at high values or acquire shares in the purchasing company via share swaps).

Nowadays there is also a lot of pure speculation going on without any fundamental value considerations. This is akin to gambling, and in a bubble market it can look like the casino keeps paying out as everyone keeps converting their winnings into chips and bets it all again. But the market isn't a casino, and bubble stock values are held up by the demand to keep playing. This is great for everyone until everyone tries to sell at the same time.

I think maybe you don't follow the companies closely enough. The poster you are replying to mentioned AMZN and TSLA.

Amzn's core businesses are very profitable, but they are constantly reinvesting those profits into new areas where they are growing. It's like a conglomeration of start ups, each aiming at future profit. It's like you've invested in one profitable company, and instead of dividends, you are getting shares of new start ups.

TSLA has now been profitable for 9 quarters, recently massively profitable with billions in free cash flow. Analysts are projecting even more to come, with profit margins approaching that of Apple and a total addressable market 10x the size. (I feel like TSLA is one of the few exceptions to the problems the author identifies in the article.). The TSLA bulls that I follow are all talking about future profits and how to discount those to net present value.

I agree those are profitable. Because they are actually selling something. That's a normal company. Talking more about companies which are mostly relying on increasing user count. I get that they may eventually turn a profit. But nobody talk about the profit.

I mean, the companies that are talking about increasing user counts... the users generally are the product, or ads for those users are the product.

Both Tesla and Amazon have never payed out a dividend. If profitable companies are not giving any money how can I expect unprofitable ones to give me money in the future?

When companies generate cash flow from profits, three major things they do with that cash are 1) pay dividends, 2) stock buybacks, 3) reinvest in the company. Shareholder's prefer the company to engage in number 3 if the company can reinvest with high ROI. If they pay the shareholders a dividend, and the shareholder can only invest that at 10%, it's ok but not as good as if the company thinks it can invest and do better.

The "plan" with these growth companies is to reinvest in themselves and keep growing as big as possible until the cost to grow is too much, or the ROI from growing is less than is generally available elsewhere. Only then will they pay dividends or do stock buybacks (which are functionally equivilant, but with favorable tax ramifications). The "plan" is that you hold for 10 or 20 years or more and then get your dividends then. Or sell at a profit sooner, because the stock will be worth more because it will be closer to that future pay day.

You can expect unprofitable companies to give you money in the future if you believe in their business plan and believe that they can execute.

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