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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
by 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 agoDiscounted 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.