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Are you honestly suggesting that a company with fewer than 200 employees is worth more than: * GM * Ford * Honda Combined. That is ridiculous and just highlig

by gjolund 10y ago

Are you honestly suggesting that a company with fewer than 200 employees is worth more than: * GM * Ford * Honda Combined. That is ridiculous and just highlights how big a bubble is brewing in SV. We value a couple hundred million fickle users more than hundreds of thousands of actual employees, physical factories, and entire supply chain industries.

nostrademons 10y ago
This is a misunderstanding of where shareholder value comes from. The valuation (market cap) of a company is a reflection of the value of the assets that the company owns. That includes IP, trademarks, brand assets (somewhat perversely, this also includes user habits), business relationships & contracts, any resellable physical goods or cash that the company owns, and all future cash flows that will accrue to the company. Basically, the stuff that an employee, supplier, or customer could not take with them if they chose to do business with someone else. Now, there's also the concept of economic value, which is the value that customers of a company (or industry) are willing to spend on its product. This can be reasonably proxied by the total revenue of the industry - for your GM + Ford + Honda example, that's about $150B each, or $450B (and leaves out the 800 lb. gorilla, Toyota). That's a lot larger than the total $60-80B market for all brand advertising. But building cars has a long & large value chain. GM + Ford + Honda can't do it all on their own. They each employ roughly 200,000 people, many of whom are relatively highly paid thanks to union agreements. They have literally thousands of suppliers that they buy parts from. These suppliers themselves need to buy parts and supplies from labor-intensive industries like mining. As a result, the company captures comparatively little of the profit from all of this work. Facebook, for example, makes about $6B in net income off $20B in revenue, while GM makes $10B in profit off $150B in revenue. This also implies that further growth will benefit companies like Facebook or SnapChat much more than it would companies like GM: if margins stay the same, Facebook gets to $10B in profits with $30B in revenue, while GM would have to get to $300B in revenue (probably not happening) to get to $20B in profits. It's a plus, from a shareholder value perspective, that SnapChat only employs 200 or so people, and their largest expense is paying Google for AppEngine bills. It means that whatever value SnapChat creates, the shareholders will capture almost all of it. Indeed, based on how often car commercials appear on TV, it's likely that a good portion of GM & Ford's revenue will become SnapChat's profit, just like how a good portion of SnapChat's revenue becomes Google's profit.
- gjolund 10y ago
  Really solid reply, and a great explanation. I completely understand that from a shareholder perspective companies like facebook and snapchat are huge wins. However my argument is that as a society these companies have very little value. I believe that the current wave of tech startups are the equivalent of shareholder junk food. I nice relatively immediate return, and no real long term value.
  - lotso 10y ago
    Providing more compelling forms of communication is incredibly valuable to society.
- ChemicalWarfare 10y ago
  don't you as a shareholder get much more volatility with 'hot shot' companies that can explode on a whim and are easily replaced by a competitive product due to a very low barrier to entry? I'm actually surprised the inctomis and lycos' of the dot com bubble aren't weighing in heavier on the investor decisions these days.
  - S4M 10y ago
    I don't know what was inctomis, but in the case of lycos it was very easy to switch of search engine, while someone who wants to compete with SnapChat will be facing a chicken and egg problem (nobody will want to join SnapChat because nobody will be there at first), so en barrier to compete to SnapChat is not that low, even if the product isn't technically hard to replicate.
    - ChemicalWarfare 10y ago
      Inktomi: https://en.wikipedia.org/wiki/Inktomi https://en.wikipedia.org/wiki/Inktomi Was valued at 25B in 2000, ended up getting acquired by Yahoo for 235M. In terms of stocks - from $241 down to $1.63 That easy replication of the product is exactly what I'm talking about. Search engine is actually a much more sophisticated setup and even in that space multiple companies went belly up.

by gjolund 10y ago

nostrademons 10y ago

This is a misunderstanding of where shareholder value comes from. The valuation (market cap) of a company is a reflection of the value of the assets that the company owns. That includes IP, trademarks, brand assets (somewhat perversely, this also includes user habits), business relationships & contracts, any resellable physical goods or cash that the company owns, and all future cash flows that will accrue to the company. Basically, the stuff that an employee, supplier, or customer could not take with them if they chose to do business with someone else. Now, there's also the concept of economic value, which is the value that customers of a company (or industry) are willing to spend on its product. This can be reasonably proxied by the total revenue of the industry - for your GM + Ford + Honda example, that's about $150B each, or $450B (and leaves out the 800 lb. gorilla, Toyota). That's a lot larger than the total $60-80B market for all brand advertising. But building cars has a long & large value chain. GM + Ford + Honda can't do it all on their own. They each employ roughly 200,000 people, many of whom are relatively highly paid thanks to union agreements. They have literally thousands of suppliers that they buy parts from. These suppliers themselves need to buy parts and supplies from labor-intensive industries like mining. As a result, the company captures comparatively little of the profit from all of this work. Facebook, for example, makes about $6B in net income off $20B in revenue, while GM makes $10B in profit off $150B in revenue. This also implies that further growth will benefit companies like Facebook or SnapChat much more than it would companies like GM: if margins stay the same, Facebook gets to $10B in profits with $30B in revenue, while GM would have to get to $300B in revenue (probably not happening) to get to $20B in profits. It's a plus, from a shareholder value perspective, that SnapChat only employs 200 or so people, and their largest expense is paying Google for AppEngine bills. It means that whatever value SnapChat creates, the shareholders will capture almost all of it. Indeed, based on how often car commercials appear on TV, it's likely that a good portion of GM & Ford's revenue will become SnapChat's profit, just like how a good portion of SnapChat's revenue becomes Google's profit.

gjolund 10y ago
Really solid reply, and a great explanation. I completely understand that from a shareholder perspective companies like facebook and snapchat are huge wins. However my argument is that as a society these companies have very little value. I believe that the current wave of tech startups are the equivalent of shareholder junk food. I nice relatively immediate return, and no real long term value.
- lotso 10y ago
  Providing more compelling forms of communication is incredibly valuable to society.
ChemicalWarfare 10y ago
don't you as a shareholder get much more volatility with 'hot shot' companies that can explode on a whim and are easily replaced by a competitive product due to a very low barrier to entry? I'm actually surprised the inctomis and lycos' of the dot com bubble aren't weighing in heavier on the investor decisions these days.
- S4M 10y ago
  I don't know what was inctomis, but in the case of lycos it was very easy to switch of search engine, while someone who wants to compete with SnapChat will be facing a chicken and egg problem (nobody will want to join SnapChat because nobody will be there at first), so en barrier to compete to SnapChat is not that low, even if the product isn't technically hard to replicate.
  - ChemicalWarfare 10y ago
    Inktomi: https://en.wikipedia.org/wiki/Inktomi https://en.wikipedia.org/wiki/Inktomi Was valued at 25B in 2000, ended up getting acquired by Yahoo for 235M. In terms of stocks - from $241 down to $1.63 That easy replication of the product is exactly what I'm talking about. Search engine is actually a much more sophisticated setup and even in that space multiple companies went belly up.