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It's so interesting how people try to rationalize modern valuations by connecting them to some other metric (P/E, growth, etc.). None of that is true. Stock p

It's so interesting how people try to rationalize modern valuations by connecting them to some other metric (P/E, growth, etc.). None of that is true. Stock price presents demand for the stock. Demand is emotional. The stock market represent (rich) people's feelings. I want to own a piece of Apple, because a bunch of others want a piece of Apple. Tesla's stock is exhibit A for this. If there was a direct correlation between some metric and stock price, every trade would be automated.

gzu 6y ago
Don't forget the non-emotional constant demand for Apple shares caused by stock buybacks combined with a 7% weight in the S&P 500. Every new dollar invested in an index tracking ETF/mutual fund needs to buy 7c worth of Apple stock from someone. It's a huge supply/demand problem. At what price will someone forego Apple shares? What happens when Apple is 10%, 15% etc of the S&P 500 index? Where will these shares to sell come from? At this point, why would anyone holding Apple shares outright sell? This demand may only lead to a self reinforcing feedback loop where: a greater market cap (3T?) -> higher index weight (10+%) -> greater buying pressure -> more shares locked up in index funds (not available for sale) -> repeat This is explains why there has been increasingly volatile movements in Apple shares. This lack of share liquidity works both directions: buying and selling. Not enough active investors are available to step in when passive investors (who now make up an enormous portion of capital markets) decide to start selling index tracking funds in bulk.
- naveen99 6y ago
  Share buy backs raise the share price, but not market cap. so if you have 101 shares of Apple. And Apple buys 1 of those shares back from you, not much has changed as far as who has more value.
  - gzu 6y ago
    Sure in a perfect world you decide to sell 1 share to Apple. The share price increases to account to for the lost share and market cap stays same. In reality, enormous swaths of shares are held by index tracking funds and everyday investors who don’t sell their shares into buybacks. In this case the market price based off supply/demand must rise in order to find someone who will let go of a share so Apple can buy it.
    - naveen99 6y ago
      you haven't said anything new here. Price must rise to account for destruction of a share, but market cap stays the same... (price / share goes up, price / fraction of company stays the same)
      - gzu 6y ago
        Your logic is flawed in that shares aren't simply "destroyed" they have to be bought back on the open market at an agreed upon price from a willing seller. The sellers of the shares may not want to sell and will therefore require more than the perfect price 𐤃X that accounts for adjustment of market cap based on reduction in shares. In theory if no one wants to sell shares of Apple during a buyback the share price will head towards infinity. There's always a price though that someone will let go of a share at.
      - rubber_duck 6y ago
        >price / share goes up, price / fraction of company stays the same That is obviously not true and he's pointing out why - if the market isn't very liquid, in this case not a lot of sales, price can jump nonlinearly.
        naveen99 6y ago
        by this logic a reverse stock split would increase the market cap. No need to even waste money buying back any shares... free market cap rise, bonuses for ceo, cfo, existing shareholders rejoice :)
        rubber_duck 6y ago
        What does reverse stock split have to do with it ? Buyback happens on the market and it removes stocks from circulation, if the demand is still there but buyback eliminated supply because people are holding on to the rest of the stock then the price automatically goes up and increases the market cap more - it's about liquidity - if you do a buyback of 1 billion suddenly there's 1 billion on the sell side that's gone but people still want to buy the stock - so the price goes up.
bhupy 6y ago
> If there was a direct correlation between some metric and stock price, every trade would be automated. 80% of the stock market is controlled by automated trading machines: https://www.cnbc.com/2019/06/28/80percent-of-the-stock-market-is-now-on-autopilot.html https://www.cnbc.com/2019/06/28/80percent-of-the-stock-marke... > Tesla's stock is exhibit A for this. It's probably not wise to extrapolate the behavior of the entire stock market (literally trillions of dollars in value) just off of one hype-driven anomalous outlier.
- mikkelam 6y ago
  > 80% of the stock market is controlled by automated trading machines Who programmed the incentives of these machines? Humans. What do they base their actions on? Other robots sure, but also humans
  - bhupy 6y ago
    The incentives are based on the very metrics that the GP commenter alleged are NOT used to value stocks (P/E, revenue, growth). It’s one thing to argue that the stock market is purely driven by emotion and irrationality. It’s another thing entirely to argue that automation based on P/E, revenue, growth are tantamount to emotion and irrationality.
safog 6y ago
Ultimately price and (some tenuous definition of) value can diverge in the short term but over the long run they _will_ converge. Apple's in a short term bubble. That's not to say they aren't a great company in the long term but I really question the wisdom of paying 462$ or whatever for their stock at this point in time.
throwaw4y-plate 6y ago
Honest question: is AAPL's or TSLA's market cap any more realistic than bitcoin's? It seems as if the prices have become completely uncoupled from the actual businesses.
- bhupy 6y ago
  It makes no sense to compare AAPL to TSLA. Apple's P/E ratio (35) is less than Amazon's and about the same as Google/FB. Apple's FY2020 revenue was nearly $300B, so $2T market cap represents a ~7x revenue multiple which is...not crazy at all. TSLA market cap OTOH, is Bitcoin-level speculation. Its P/E ratio is like 985. Apple's valuation is mostly in line with its business (modulo Fed monetary policy and S&P distortion). Tesla's valuation is pure hype.
nightski 6y ago
The stock market does represent people's feelings, true, but people's feelings are influenced by metrics (with reason). Sure growth investing strategies look for stocks of companies that will grow quickly but pay little in dividends. But value investing often looks for companies which have solid metrics and will pay solid dividends which is a huge part of investing after all.

gzu 6y ago

Don't forget the non-emotional constant demand for Apple shares caused by stock buybacks combined with a 7% weight in the S&P 500. Every new dollar invested in an index tracking ETF/mutual fund needs to buy 7c worth of Apple stock from someone. It's a huge supply/demand problem. At what price will someone forego Apple shares? What happens when Apple is 10%, 15% etc of the S&P 500 index? Where will these shares to sell come from? At this point, why would anyone holding Apple shares outright sell? This demand may only lead to a self reinforcing feedback loop where: a greater market cap (3T?) -> higher index weight (10+%) -> greater buying pressure -> more shares locked up in index funds (not available for sale) -> repeat This is explains why there has been increasingly volatile movements in Apple shares. This lack of share liquidity works both directions: buying and selling. Not enough active investors are available to step in when passive investors (who now make up an enormous portion of capital markets) decide to start selling index tracking funds in bulk.

naveen99 6y ago
Share buy backs raise the share price, but not market cap. so if you have 101 shares of Apple. And Apple buys 1 of those shares back from you, not much has changed as far as who has more value.
- gzu 6y ago
  Sure in a perfect world you decide to sell 1 share to Apple. The share price increases to account to for the lost share and market cap stays same. In reality, enormous swaths of shares are held by index tracking funds and everyday investors who don’t sell their shares into buybacks. In this case the market price based off supply/demand must rise in order to find someone who will let go of a share so Apple can buy it.
  - naveen99 6y ago
    you haven't said anything new here. Price must rise to account for destruction of a share, but market cap stays the same... (price / share goes up, price / fraction of company stays the same)
    - gzu 6y ago
      Your logic is flawed in that shares aren't simply "destroyed" they have to be bought back on the open market at an agreed upon price from a willing seller. The sellers of the shares may not want to sell and will therefore require more than the perfect price 𐤃X that accounts for adjustment of market cap based on reduction in shares. In theory if no one wants to sell shares of Apple during a buyback the share price will head towards infinity. There's always a price though that someone will let go of a share at.
    - rubber_duck 6y ago
      >price / share goes up, price / fraction of company stays the same That is obviously not true and he's pointing out why - if the market isn't very liquid, in this case not a lot of sales, price can jump nonlinearly.
      - naveen99 6y ago
        by this logic a reverse stock split would increase the market cap. No need to even waste money buying back any shares... free market cap rise, bonuses for ceo, cfo, existing shareholders rejoice :)
        rubber_duck 6y ago
        What does reverse stock split have to do with it ? Buyback happens on the market and it removes stocks from circulation, if the demand is still there but buyback eliminated supply because people are holding on to the rest of the stock then the price automatically goes up and increases the market cap more - it's about liquidity - if you do a buyback of 1 billion suddenly there's 1 billion on the sell side that's gone but people still want to buy the stock - so the price goes up.

bhupy 6y ago

> If there was a direct correlation between some metric and stock price, every trade would be automated. 80% of the stock market is controlled by automated trading machines: https://www.cnbc.com/2019/06/28/80percent-of-the-stock-market-is-now-on-autopilot.html https://www.cnbc.com/2019/06/28/80percent-of-the-stock-marke... > Tesla's stock is exhibit A for this. It's probably not wise to extrapolate the behavior of the entire stock market (literally trillions of dollars in value) just off of one hype-driven anomalous outlier.

mikkelam 6y ago
> 80% of the stock market is controlled by automated trading machines Who programmed the incentives of these machines? Humans. What do they base their actions on? Other robots sure, but also humans
- bhupy 6y ago
  The incentives are based on the very metrics that the GP commenter alleged are NOT used to value stocks (P/E, revenue, growth). It’s one thing to argue that the stock market is purely driven by emotion and irrationality. It’s another thing entirely to argue that automation based on P/E, revenue, growth are tantamount to emotion and irrationality.

safog 6y ago

Ultimately price and (some tenuous definition of) value can diverge in the short term but over the long run they _will_ converge. Apple's in a short term bubble. That's not to say they aren't a great company in the long term but I really question the wisdom of paying 462$ or whatever for their stock at this point in time.

throwaw4y-plate 6y ago

Honest question: is AAPL's or TSLA's market cap any more realistic than bitcoin's? It seems as if the prices have become completely uncoupled from the actual businesses.

bhupy 6y ago
It makes no sense to compare AAPL to TSLA. Apple's P/E ratio (35) is less than Amazon's and about the same as Google/FB. Apple's FY2020 revenue was nearly $300B, so $2T market cap represents a ~7x revenue multiple which is...not crazy at all. TSLA market cap OTOH, is Bitcoin-level speculation. Its P/E ratio is like 985. Apple's valuation is mostly in line with its business (modulo Fed monetary policy and S&P distortion). Tesla's valuation is pure hype.

nightski 6y ago

The stock market does represent people's feelings, true, but people's feelings are influenced by metrics (with reason). Sure growth investing strategies look for stocks of companies that will grow quickly but pay little in dividends. But value investing often looks for companies which have solid metrics and will pay solid dividends which is a huge part of investing after all.