3 ms·

I'm not sure if you're actually expecting an answer here or just raging, but one reason that Gamestop (and many other stocks) have a fundamental value is becaus

I'm not sure if you're actually expecting an answer here or just raging, but one reason that Gamestop (and many other stocks) have a fundamental value is because they pay out a dividend to the holder. For example, if the dividend that was paid out per share of GME on, for example, March 15th, 2019 was $0.38, and you owned 1000 shares (and ~4k investment), then you received a payment of $380. In many companies, these dividend amounts and schedules are extremely predictable. You can then use that money to buy food, or build a house, if you wanted. The fundamental value of many stocks is tied to the dividend that it will pay you for owning it. Obviously "growth" stocks (stocks that as designed to increase in value, rather than pay a dividend, because funds are used to buy-back stock instead, thus raising the price) is valued differently, but there is still a fundamental value based on the financial situation of the underlying company.

freeone3000 6y ago
If that were true, we'd be able to value stocks simply by summing the expected dividend over the next 20 years. This makes no sense for GME, but, it also makes no sense for MSFT, whose value has more than doubled in price since three years ago with no increase in dividends. It doesn't make sense for TLSA, which doesn't even have dividends and doesn't do buybacks (and even has outstanding ATMs!). It doesn't make sense for GOOG, it doesn't make sense for AMD, it doesn't make sense for NVDA. Let's assume that you're right, and that nearly every tech stock, automotive stock, and stock for any company the average person has heard of, or is in an index, is drastically overvalued. Is there any event that would cause the value to "correct"? Some shift causing people to sell their TLSA and buy F, whose value is "more correct"? And if not: what makes the value based on this more correct than the value you can access through trades?
- nrmitchi 6y ago
  The world is an extremely complex place, and valuing things is extremely hard. There are way to many factors that contribute. The "correct" value will vary based on both factors in the world, as well as individual-specific factors[0]. The next-best alternative is one of them. We are currently in an economic situation where money is literally being printed by the trillions, there has not been a offsetting set of funds going back to the government (thus increasing the money supply), and interest rates are 0 (and stated to stay there for the forseeable future). There is lots of money, that has to go to something, which raises the price of everything (or devalues the dollar, depending on how you look at it). You ask 'Is there any event that would cause the value to "correct"?'. As a definitely-not-economist, I would guess any event that modifies either of the aspects I mentioned above. Reducing the money supply (perhaps taxing capital gains more reasonably), or increasing interest rates. [0] I want to point out here that each individual entity buying something will have a different "correct price" for them, based on individual factors, especially at scale. One of these is individual risk, and how the risk associated with a given stock correlates with other risk in your life. If you live in an oil town, investing in a correlated asset should require a better potential payoff, and thus a better entry point, than someone who has no other oil exposure (if the industry collapses, do you really want to lose both your job and your investments?) PS: > It doesn't make sense for TLSA I never said, and would never make the argument, that TSLA is "correctly" valued. But I'm also not insane so am not going to try to short it.
- caleblloyd 6y ago
  A stock's fundamental value is based on current Shareholders Equity (SE) + future earnings potential. Dividends and share buybacks are just a way to return Shareholders Equity to the shareholder. In Dec 2018, MSFT had 92B of SE with a market cap of 1.2T. In Dec 2020, MSFT had 130B of SE with a market cap of 1.7T. They earned money which added to their SE, and they returned some SE to shareholders via dividends and share buybacks over those 2 years. If in Dec 2020 MSFT sold all of its assets, settled all of its liabilities, and closed its doors, it would theoretically be able to pay 130B in dividends to shareholders. The share price would drop by 92% (1 - 130B/1.7T). So 92% of its share price is based on its future earning potential. This number goes up or down as the market expectations for their future earnings potential goes up or down. Dividends reduce SE, which is typically why the share price drops by the amount of the dividend on the ex-dividend date. Share buybacks reduce SE and reduce the number of shares outstanding, which increases each Shareholder's equity stake. GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price.
  - tremon 6y ago
    Dividends reduce SE By what mechanism does this happen? Paying dividends doesn't affect the amount of shares outstanding nor meaningfully impact the market cap?
    - mrep 6y ago
      It absolutely does, it is just hard to notice because it is small enough and distributed over time thus making it hard to see in a market cap graph especially when most of the value in the market cap is dominated by expected future earnings. If apple were to do a 1 time 150 billion dollar dividend, you would almost certainly see their market cap drop by a similar amount the day after. However apples market cap is 2.39 trillion so that is still only 6.27% of their market cap and could get drowned out by normal daily swings. Highly doubt it though and I would expect to see a corresponding runup to the event to claim the dividend and a corresponding drop after.
  - 6y ago
deleted 6y ago
[deleted]

freeone3000 6y ago

If that were true, we'd be able to value stocks simply by summing the expected dividend over the next 20 years. This makes no sense for GME, but, it also makes no sense for MSFT, whose value has more than doubled in price since three years ago with no increase in dividends. It doesn't make sense for TLSA, which doesn't even have dividends and doesn't do buybacks (and even has outstanding ATMs!). It doesn't make sense for GOOG, it doesn't make sense for AMD, it doesn't make sense for NVDA. Let's assume that you're right, and that nearly every tech stock, automotive stock, and stock for any company the average person has heard of, or is in an index, is drastically overvalued. Is there any event that would cause the value to "correct"? Some shift causing people to sell their TLSA and buy F, whose value is "more correct"? And if not: what makes the value based on this more correct than the value you can access through trades?

nrmitchi 6y ago
The world is an extremely complex place, and valuing things is extremely hard. There are way to many factors that contribute. The "correct" value will vary based on both factors in the world, as well as individual-specific factors[0]. The next-best alternative is one of them. We are currently in an economic situation where money is literally being printed by the trillions, there has not been a offsetting set of funds going back to the government (thus increasing the money supply), and interest rates are 0 (and stated to stay there for the forseeable future). There is lots of money, that has to go to something, which raises the price of everything (or devalues the dollar, depending on how you look at it). You ask 'Is there any event that would cause the value to "correct"?'. As a definitely-not-economist, I would guess any event that modifies either of the aspects I mentioned above. Reducing the money supply (perhaps taxing capital gains more reasonably), or increasing interest rates. [0] I want to point out here that each individual entity buying something will have a different "correct price" for them, based on individual factors, especially at scale. One of these is individual risk, and how the risk associated with a given stock correlates with other risk in your life. If you live in an oil town, investing in a correlated asset should require a better potential payoff, and thus a better entry point, than someone who has no other oil exposure (if the industry collapses, do you really want to lose both your job and your investments?) PS: > It doesn't make sense for TLSA I never said, and would never make the argument, that TSLA is "correctly" valued. But I'm also not insane so am not going to try to short it.
caleblloyd 6y ago
A stock's fundamental value is based on current Shareholders Equity (SE) + future earnings potential. Dividends and share buybacks are just a way to return Shareholders Equity to the shareholder. In Dec 2018, MSFT had 92B of SE with a market cap of 1.2T. In Dec 2020, MSFT had 130B of SE with a market cap of 1.7T. They earned money which added to their SE, and they returned some SE to shareholders via dividends and share buybacks over those 2 years. If in Dec 2020 MSFT sold all of its assets, settled all of its liabilities, and closed its doors, it would theoretically be able to pay 130B in dividends to shareholders. The share price would drop by 92% (1 - 130B/1.7T). So 92% of its share price is based on its future earning potential. This number goes up or down as the market expectations for their future earnings potential goes up or down. Dividends reduce SE, which is typically why the share price drops by the amount of the dividend on the ex-dividend date. Share buybacks reduce SE and reduce the number of shares outstanding, which increases each Shareholder's equity stake. GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price.
- tremon 6y ago
  Dividends reduce SE By what mechanism does this happen? Paying dividends doesn't affect the amount of shares outstanding nor meaningfully impact the market cap?
  - mrep 6y ago
    It absolutely does, it is just hard to notice because it is small enough and distributed over time thus making it hard to see in a market cap graph especially when most of the value in the market cap is dominated by expected future earnings. If apple were to do a 1 time 150 billion dollar dividend, you would almost certainly see their market cap drop by a similar amount the day after. However apples market cap is 2.39 trillion so that is still only 6.27% of their market cap and could get drowned out by normal daily swings. Highly doubt it though and I would expect to see a corresponding runup to the event to claim the dividend and a corresponding drop after.
- 6y ago

deleted 6y ago

[deleted]