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I catch your drift, but this isn’t technically true. A company with negative discounted cash flows might have a positive expected value because it can undertake

I catch your drift, but this isn’t technically true. A company with negative discounted cash flows might have a positive expected value because it can undertake a risky project that has a negative expected value. Usually this project will bankrupt the company, but occasionally it will provide a windfall. During bankruptcy, the company might not pay off all of its debts, but it can’t be worth less than 0 due to limited liability. During the unlikely event of success, the company is worth something. If you want to know more, look up “moral hazard” and “real options”.

iscrewyou 7y ago
Not OP. But that’s a hypothetical for a company who is already in business and is betting on a product. Right? Like Sony betting on the next gen console by selling it at a $100 loss but then make it up later when they take hold of the market. But that’s Sony and one of their products. I see Moral Hazard as an example of that. Nowadays it’s almost every company betting their whole business hoping that their product will come out on top or they’ll let the public pay for the debt through IPOs.
roenxi 7y ago
If I'm reading you correctly you are arguing to something slightly different than what OP said. OP says that if a company can't go cash flow positive it is worthless, you say there there is always a chance that a company might experience a sudden turn around and go cash flow positive. Both are true. However, theory and practice are identical only in theory. If there is a company with negative projected cash flows relying on a negative-expected-value project succeeding unexpectedly that company is probably near worthless. If ordinary investors are relying on "maybe things won't turn out the way we expect them to"-style logic to make their investment decisions then the market is doomed.
- TeMPOraL 7y ago
  > However, theory and practice are identical only in theory. If there is a company with negative projected cash flows relying on a negative-expected-value project succeeding unexpectedly that company is probably near worthless. Well, Uber is an exception to this rule apparently. The way I read the GP, they're just saying that LLCs are good to be used for gambling.
t_mann 7y ago
In technical terms, the correct formula to use is E(max(CF,0)), not max(E(CF),0). In the words of the Merton model, equity in a limited liability company behaves like a call option on its assets/cash flow. In reality, these may follow a far more complex process than a geometric Brownian motion with drift as in the Merton model, but that only changes how you compute the expectation in the formula, not the formula itself.

iscrewyou 7y ago

Not OP. But that’s a hypothetical for a company who is already in business and is betting on a product. Right? Like Sony betting on the next gen console by selling it at a $100 loss but then make it up later when they take hold of the market. But that’s Sony and one of their products. I see Moral Hazard as an example of that. Nowadays it’s almost every company betting their whole business hoping that their product will come out on top or they’ll let the public pay for the debt through IPOs.

roenxi 7y ago

If I'm reading you correctly you are arguing to something slightly different than what OP said. OP says that if a company can't go cash flow positive it is worthless, you say there there is always a chance that a company might experience a sudden turn around and go cash flow positive. Both are true. However, theory and practice are identical only in theory. If there is a company with negative projected cash flows relying on a negative-expected-value project succeeding unexpectedly that company is probably near worthless. If ordinary investors are relying on "maybe things won't turn out the way we expect them to"-style logic to make their investment decisions then the market is doomed.

TeMPOraL 7y ago
> However, theory and practice are identical only in theory. If there is a company with negative projected cash flows relying on a negative-expected-value project succeeding unexpectedly that company is probably near worthless. Well, Uber is an exception to this rule apparently. The way I read the GP, they're just saying that LLCs are good to be used for gambling.

t_mann 7y ago

In technical terms, the correct formula to use is E(max(CF,0)), not max(E(CF),0). In the words of the Merton model, equity in a limited liability company behaves like a call option on its assets/cash flow. In reality, these may follow a far more complex process than a geometric Brownian motion with drift as in the Merton model, but that only changes how you compute the expectation in the formula, not the formula itself.