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It's important to note that stock valuations are derived from the expected future profitability of a company. Stock is a claim on future profits. Compared to
by dstein 16y ago
It's important to note that stock valuations are derived from the expected future profitability of a company. Stock is a claim on future profits. Compared to a company like Halliburton, who has to build billion-dollar oil rigs before they make any profit, a technology company like Facebook is a lot more lucrative and thus its stock can inflate quickly if the profits expand faster than costs. And generally technology costs go down over time while profits increase exponentially. So you have a powder-keg scenario in Facebook if, and only if, they find a profitable business model based on their enormous userbase. And they better find that business model or the stock will crash like it's the year 2000.
- fleitz 16y agoAccording to their PR they have found such a business model and are now profitable.
- jerf 16y ago"profitable" != dstein's "powder key scenario". I will totally believe they are profitable, I do not believe that right this second they are bringing in enough to justify a $50B valuation on that ground alone.
- arctangent 16y agoHistory will tell whether this purported business model works out quite as well as their PR department promise. As an aside, this article of Charles Ponzi makes for great reading ;-) http://en.wikipedia.org/wiki/Charles_Ponzi http://en.wikipedia.org/wiki/Charles_Ponzi
- magicalist 16y agowhile stock valuations and expected future profitability are usually correlated (to some extent), if a company isn't paying dividends, wouldn't it be much more correct to say that stock valuations are derived from the expected future valuations of that same stock?
- dstein 16y agoIt's the same thing. If the company isn't paying dividends the stock price includes whatever dividends the company will pay out in the future. The value of the stock is the total value of all expected future dividends priced in today's dollars. And in Facebook's case investors think (or want you to believe) that the future profits will be pretty big.