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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

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.

georgeecollins 7y ago
It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value. Clearly there are valuable companies in this category such as Amazon and Facebook early in their days as public companies. But trying to figure out what they might be worth someday is an exercise in predicting what the future of the world might be. It is not like making a calculation on the back of an envelope. So to the OP, yeah I totally agree. It's fascinating.
- mruts 7y ago
  Hypothetically, a companies value should be a sum of it’s expected infinite cash flows divided by the discount rate. 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.
  - georgeecollins 7y ago
    Discounted cash flow analysis is not what is going on here. Looking at it historically, FB went public with a valuation that its web business at the time could never justify. If you assume people who bought at the price were making a rational calculation, they weren't valuing the business cash flow, they were valuing something else Facebook had. A technical capability, the management, a brand, the things that let them extend their business to mobile messaging and acquire WhatsApp and Instagram. What happened wasn't just cash flow growth. Ditto for Amazon and Google. 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.
- dcolkitt 7y ago
  > It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value. 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.
opportune 7y ago
Slack has essentially no marginal cost. Cars have massive marginal cost
- mfatica 7y ago
  No marginal cost? What do you call operating expenses, AWS for example?
  - opportune 7y ago
    Per user it is probably a few pennies per month if they are smart about it. Which is basically nothing as a percent of a single unit sale (subscribing user) compared to the marginal cost of selling cars
    - mfatica 7y ago
      If it's a few pennies for month how are their operating expenses greater than their revenue? Have you even looked at their public filing or are you just making assumptions?
      - btown 7y ago
        Cost of revenue was $51mm this year for 10mm active users, so $5/user. Per their S-1 https://www.sec.gov/Archives/edgar/data/1764925/000162828019004786/slacks-1.htm#s8d6204acc583485eb9f4e9bf211b5e4a https://www.sec.gov/Archives/edgar/data/1764925/000162828019... : "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.
lotsofpulp 7y ago
The current stock price is the value of one stock, selling on a specific date, at a specific time, with a specific number of shares outstanding, at a certain trade volume, as compared to other options one can purchase in the market. 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.
- mlthoughts2018 7y ago
  That’s a bit disingenuous. Efficient market theory gives clear reasons to believe that rational investors would produce a market valuation of the stock, based on net present value of future income streams, that reflects marginal utility in putting a dollar into the stock vs not. 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?
  - b_tterc_p 7y ago
    you can suggest that true stock values are both unknowable and that the market is a weak approximation at the same time. Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. 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.
    - mlthoughts2018 7y ago
      > Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. 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.
m463 7y ago
I remember thinking the same sorts of things with the original dot-com IPOs, and again later when the dot-com companies started buying established companies. Never saw a Slack-Tesla or AOL-Exxon kind of mixture though.
busymom0 7y ago
Another comparison is Uber vs Tesla where Uber is valued at 80 whereas Tesla at 40B.
Gibbon1 7y ago
Recently read an article comparing FAANG companies to General Motors / General Electric in the 1950's. 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.

georgeecollins 7y ago

It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value. Clearly there are valuable companies in this category such as Amazon and Facebook early in their days as public companies. But trying to figure out what they might be worth someday is an exercise in predicting what the future of the world might be. It is not like making a calculation on the back of an envelope. So to the OP, yeah I totally agree. It's fascinating.

mruts 7y ago
Hypothetically, a companies value should be a sum of it’s expected infinite cash flows divided by the discount rate. 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.
- georgeecollins 7y ago
  Discounted cash flow analysis is not what is going on here. Looking at it historically, FB went public with a valuation that its web business at the time could never justify. If you assume people who bought at the price were making a rational calculation, they weren't valuing the business cash flow, they were valuing something else Facebook had. A technical capability, the management, a brand, the things that let them extend their business to mobile messaging and acquire WhatsApp and Instagram. What happened wasn't just cash flow growth. Ditto for Amazon and Google. 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.
dcolkitt 7y ago
> It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value. 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.

opportune 7y ago

Slack has essentially no marginal cost. Cars have massive marginal cost

mfatica 7y ago
No marginal cost? What do you call operating expenses, AWS for example?
- opportune 7y ago
  Per user it is probably a few pennies per month if they are smart about it. Which is basically nothing as a percent of a single unit sale (subscribing user) compared to the marginal cost of selling cars
  - mfatica 7y ago
    If it's a few pennies for month how are their operating expenses greater than their revenue? Have you even looked at their public filing or are you just making assumptions?
    - btown 7y ago
      Cost of revenue was $51mm this year for 10mm active users, so $5/user. Per their S-1 https://www.sec.gov/Archives/edgar/data/1764925/000162828019004786/slacks-1.htm#s8d6204acc583485eb9f4e9bf211b5e4a https://www.sec.gov/Archives/edgar/data/1764925/000162828019... : "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.

lotsofpulp 7y ago

The current stock price is the value of one stock, selling on a specific date, at a specific time, with a specific number of shares outstanding, at a certain trade volume, as compared to other options one can purchase in the market. 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.

mlthoughts2018 7y ago
That’s a bit disingenuous. Efficient market theory gives clear reasons to believe that rational investors would produce a market valuation of the stock, based on net present value of future income streams, that reflects marginal utility in putting a dollar into the stock vs not. 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?
- b_tterc_p 7y ago
  you can suggest that true stock values are both unknowable and that the market is a weak approximation at the same time. Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. 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.
  - mlthoughts2018 7y ago
    > Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. 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.

m463 7y ago

I remember thinking the same sorts of things with the original dot-com IPOs, and again later when the dot-com companies started buying established companies. Never saw a Slack-Tesla or AOL-Exxon kind of mixture though.

busymom0 7y ago

Another comparison is Uber vs Tesla where Uber is valued at 80 whereas Tesla at 40B.

Gibbon1 7y ago

Recently read an article comparing FAANG companies to General Motors / General Electric in the 1950's. 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.