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P/E Ratios, DCF, Aswath "Dono"daran. These things are all a part of an ancient religion that do not work for growth tech companies anymore (which also happens t

P/E Ratios, DCF, Aswath "Dono"daran. These things are all a part of an ancient religion that do not work for growth tech companies anymore (which also happens to include large cap tech companies, by the way). These valuation metrics leave out everything that has to do with the potential market growth and product expansion into new verticals. People look at the S&P500 and keep parroting tired phrases such as "the P/E ratio is now higher than ever before in history", yet they don't consider that a massive part of the S&P500 is now tech growth companies rather than Exxon Mobil like it was 15-20 years ago.

newswasboring 5y ago
Pardon my ignorance, but what is the end goal here? I feel like the end goal to hold a share today is to sell it to someone else for a higher price. It just doesn't sit right with me. Feels like a ponzi scheme to be honest.
- repomies69 5y ago
  Selling to someone else with higher price is always part of capitalism, and there's nothing wrong with that. Speculation is good for the economy. Why I invest in tech stock? Because I believe the current tech companies might be 10x or 20x times the sizes in 20 years, and in 40 years they might be 1000x times the current size. Basically they could own governments and become world rulers. At least in metaverse.
  - newswasboring 5y ago
    Holy shit dude! I hope you are wrong on all accounts, especially the world rulers bit. But more on point, what do you mean by size? Just valuation of their stock? Speculation on an asset makes sense when we don't know its inherent value. I can't figure out what is the inherent value of a stock any more. Does value not derive from utility now? Utility of a stock can be governance say (voting stocks) or a share in the profit. These companies with massive valuations don't generate any profits (see: Uber). So what are people speculating on actually?
    - deleted 5y ago
      [deleted]
    - MrPatan 5y ago
      Future profits
      - newswasboring 5y ago
        They don't even pay dividends on current profits. how do you expect them to pay on future ones?
- jseban 5y ago
  It's not a zero sum game, remember that value is created by inventions and improvements. If 10 people 10 years ago would have bought stocks in amazon and kept them for 1 year each, then sold on to the next person, and the last person just holds them 1 day and cashes out at basically break even. Then all of these 10 people have made money, and that's because because amazon is more efficient at something compared to the competitors. The losers are not the people who bought the stock "high", all stock owners won, the losers are the companies who lost business to amazon because they were less efficient. So everyone can win except those who are doing things in a way that's not efficient or not up to the latest standard. The end goal is progress, to eliminate unnecessary work and constantly move forward to other more valuable work.
  - newswasboring 5y ago
    > and the last person just holds them 1 day and cashes out at basically break even. Cashes out how? That is what my confusion is. Shares don't have inherent value so to cash out you need to sell it to someone (sometimes the buyer is the company itself but I don't think that is sustainable beyond few percentage of their shares). Its not like an asset backed currency where you can go to a central bank and ask for consumable resources. (Although most times the asset is also useless, like gold). Its all just floating in the air from my point of view and "value" is just what someone else is willing to pay.
    - tomalpha 5y ago
      But shares do have an inherent value. Owning them gives you a right to a share of the profits. You own a share of the company. You can vote on who you choose to run it - i.e. the board of Directors. Now many companies recently have chosen not to distribute profits - e.g. Amazon reinvests everything back into growth. And there are types of share that don’t give you a vote on who runs the company (or your tiny ownership percentage makes it meaningless). And there are companies that don’t make any profits so there’s nothing to share out! But shares, at least classically, do have an inherent value. Edit: Examples of these classic shares are “Dividend stocks” [0], but even with say TSLA or AMZN when you buy a share you’re buying the right to a share of the future profits. [0] https://www.investopedia.com/dividend-stocks-4689744 https://www.investopedia.com/dividend-stocks-4689744 Edit2: Now of course that inherent value might be zero if the company will never make a profit…
refurb 5y ago
Exactly! “Its different this time and the old rules no longer apply”
ivanche 5y ago
So, this time it's different? Like 21 years ago when Exxon Mobil and similar companies were overvalued and imploded in the dot com bust? Oh, wait...
- lotsofpulp 5y ago
  Econ mobile profit margin is 10%, and they are selling a very fungible product that lots of competitors are also selling (they have little pricing power). Tech company profit margins are 20%+, and they are selling products which have much higher moats, and benefit from network effects. And less liability.
  - bloodyplonker22 5y ago
    Good point, and 20+% is a huge understatement. SAAS companies that are public are mostly in the 70-90% range. Also, add how easy distribution of software is compared to physical products.
kgwgk 5y ago
22 years ago the top 5 companies in the S&P 500 were not all like Exxon Mobil and Generatel Electric. Microsoft, Cisco and Intel were there. More than one third of the index caputalization was in the IT sector.
- pas 5y ago
  The usual argument is that the increase in the index since then is mostly due to increase of tech stock prices (valuations, market cap, etc), not that there were no big name IT companies back then in it.
FinanceAnon 5y ago
Is there a way to get the "PE ratio" excluding growth/marketing costs? My understanding is that the growth/marketing costs come under the operating expenses, so will not show as profits/earnings. If a company, has $100bn in revenue and puts it all back into growth and customer acquistion, it will look like they are not profitable, even if they could be if they decided to lower their growth investment. Is there a way to separate normal business running expenses vs "growth expenses"?
- dannyw 5y ago
  Yes, gross margin is what you're after.
- pas 5y ago
  Umm, but many companies just deflate like a sad balloon when they stop spending on marketing. And it's neigh impossible to separate cost of revenue from cost of revenue growth.
RivieraKid 5y ago
DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. The non-fundamental factors which have changed are: the neutral interest rate has dropped perhaps because of demographics and change in consumer behavior.
- GDC7 5y ago
  > DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. You know what makes the price of an asset? Whatever is going on in market participants brains who are bidding/asking it. DCF works somewhat because there is a certain % of market participants which uses it to determine whether to buy or sell. It doesn't work per se, it's a signal, like a sunny day NYC or the Yankees winning the night before.
  - RivieraKid 5y ago
    I'm talking about valuation, not market price. The longer your time horizon is, the less you are dependent on the rationality of other market participants (which is quite high on average). You can just sit back and collect the cash flows, no need to sell.
    - GDC7 5y ago
      Valuation for valuation's sake is kinda pointless, at the end of the day you cannot spend valuation. You spend money. Even in the long term the money you earn from your investment is dependant upon the opinion of other people. You don't know what parameter they'd use to justify to themselves their position when they decide to go long or short a particular stock or index. By the same token you don't know what parameter will people use to justify purchasing/not purchasing that particular item or service. Markets are not about companies, they are about people, because they place the bets, whether they are financial bets or betting that a good or a service will improve their quality of life.
      - RivieraKid 5y ago
marvin 5y ago
This time is different? I don't mean to say this as a snarky and meaningless rebuttal. A large part of the book that coined this phrase indeed had the subtext that something _was_ different, each and every time. When people quote it with the assumption that the other party is a fool, they miss the point. So I agree with all your points, just pointing out that historically, market turbulence has followed some time after structural changes like the one you're pointing out here. I don't have a better answer than anyone else -- the stock market is the best bet I can see for taking part in technological advancement and economic growth, and I don't see a good way to hedge. But I'm sure we'll get a nasty surprise at some point.
legulere 5y ago
Growth companies all haven't shown that they can actually be profitable.

newswasboring 5y ago

Pardon my ignorance, but what is the end goal here? I feel like the end goal to hold a share today is to sell it to someone else for a higher price. It just doesn't sit right with me. Feels like a ponzi scheme to be honest.

repomies69 5y ago
Selling to someone else with higher price is always part of capitalism, and there's nothing wrong with that. Speculation is good for the economy. Why I invest in tech stock? Because I believe the current tech companies might be 10x or 20x times the sizes in 20 years, and in 40 years they might be 1000x times the current size. Basically they could own governments and become world rulers. At least in metaverse.
- newswasboring 5y ago
  Holy shit dude! I hope you are wrong on all accounts, especially the world rulers bit. But more on point, what do you mean by size? Just valuation of their stock? Speculation on an asset makes sense when we don't know its inherent value. I can't figure out what is the inherent value of a stock any more. Does value not derive from utility now? Utility of a stock can be governance say (voting stocks) or a share in the profit. These companies with massive valuations don't generate any profits (see: Uber). So what are people speculating on actually?
  - deleted 5y ago
    [deleted]
  - MrPatan 5y ago
    Future profits
    - newswasboring 5y ago
      They don't even pay dividends on current profits. how do you expect them to pay on future ones?
jseban 5y ago
It's not a zero sum game, remember that value is created by inventions and improvements. If 10 people 10 years ago would have bought stocks in amazon and kept them for 1 year each, then sold on to the next person, and the last person just holds them 1 day and cashes out at basically break even. Then all of these 10 people have made money, and that's because because amazon is more efficient at something compared to the competitors. The losers are not the people who bought the stock "high", all stock owners won, the losers are the companies who lost business to amazon because they were less efficient. So everyone can win except those who are doing things in a way that's not efficient or not up to the latest standard. The end goal is progress, to eliminate unnecessary work and constantly move forward to other more valuable work.
- newswasboring 5y ago
  > and the last person just holds them 1 day and cashes out at basically break even. Cashes out how? That is what my confusion is. Shares don't have inherent value so to cash out you need to sell it to someone (sometimes the buyer is the company itself but I don't think that is sustainable beyond few percentage of their shares). Its not like an asset backed currency where you can go to a central bank and ask for consumable resources. (Although most times the asset is also useless, like gold). Its all just floating in the air from my point of view and "value" is just what someone else is willing to pay.
  - tomalpha 5y ago
    But shares do have an inherent value. Owning them gives you a right to a share of the profits. You own a share of the company. You can vote on who you choose to run it - i.e. the board of Directors. Now many companies recently have chosen not to distribute profits - e.g. Amazon reinvests everything back into growth. And there are types of share that don’t give you a vote on who runs the company (or your tiny ownership percentage makes it meaningless). And there are companies that don’t make any profits so there’s nothing to share out! But shares, at least classically, do have an inherent value. Edit: Examples of these classic shares are “Dividend stocks” [0], but even with say TSLA or AMZN when you buy a share you’re buying the right to a share of the future profits. [0] https://www.investopedia.com/dividend-stocks-4689744 https://www.investopedia.com/dividend-stocks-4689744 Edit2: Now of course that inherent value might be zero if the company will never make a profit…

refurb 5y ago

Exactly! “Its different this time and the old rules no longer apply”

ivanche 5y ago

So, this time it's different? Like 21 years ago when Exxon Mobil and similar companies were overvalued and imploded in the dot com bust? Oh, wait...

lotsofpulp 5y ago
Econ mobile profit margin is 10%, and they are selling a very fungible product that lots of competitors are also selling (they have little pricing power). Tech company profit margins are 20%+, and they are selling products which have much higher moats, and benefit from network effects. And less liability.
- bloodyplonker22 5y ago
  Good point, and 20+% is a huge understatement. SAAS companies that are public are mostly in the 70-90% range. Also, add how easy distribution of software is compared to physical products.

kgwgk 5y ago

22 years ago the top 5 companies in the S&P 500 were not all like Exxon Mobil and Generatel Electric. Microsoft, Cisco and Intel were there. More than one third of the index caputalization was in the IT sector.

pas 5y ago
The usual argument is that the increase in the index since then is mostly due to increase of tech stock prices (valuations, market cap, etc), not that there were no big name IT companies back then in it.

FinanceAnon 5y ago

Is there a way to get the "PE ratio" excluding growth/marketing costs? My understanding is that the growth/marketing costs come under the operating expenses, so will not show as profits/earnings. If a company, has $100bn in revenue and puts it all back into growth and customer acquistion, it will look like they are not profitable, even if they could be if they decided to lower their growth investment. Is there a way to separate normal business running expenses vs "growth expenses"?

dannyw 5y ago
Yes, gross margin is what you're after.
pas 5y ago
Umm, but many companies just deflate like a sad balloon when they stop spending on marketing. And it's neigh impossible to separate cost of revenue from cost of revenue growth.

RivieraKid 5y ago

DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. The non-fundamental factors which have changed are: the neutral interest rate has dropped perhaps because of demographics and change in consumer behavior.

GDC7 5y ago
> DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation. You know what makes the price of an asset? Whatever is going on in market participants brains who are bidding/asking it. DCF works somewhat because there is a certain % of market participants which uses it to determine whether to buy or sell. It doesn't work per se, it's a signal, like a sunny day NYC or the Yankees winning the night before.
- RivieraKid 5y ago
  I'm talking about valuation, not market price. The longer your time horizon is, the less you are dependent on the rationality of other market participants (which is quite high on average). You can just sit back and collect the cash flows, no need to sell.
  - GDC7 5y ago
    Valuation for valuation's sake is kinda pointless, at the end of the day you cannot spend valuation. You spend money. Even in the long term the money you earn from your investment is dependant upon the opinion of other people. You don't know what parameter they'd use to justify to themselves their position when they decide to go long or short a particular stock or index. By the same token you don't know what parameter will people use to justify purchasing/not purchasing that particular item or service. Markets are not about companies, they are about people, because they place the bets, whether they are financial bets or betting that a good or a service will improve their quality of life.
    - RivieraKid 5y ago

marvin 5y ago

This time is different? I don't mean to say this as a snarky and meaningless rebuttal. A large part of the book that coined this phrase indeed had the subtext that something _was_ different, each and every time. When people quote it with the assumption that the other party is a fool, they miss the point. So I agree with all your points, just pointing out that historically, market turbulence has followed some time after structural changes like the one you're pointing out here. I don't have a better answer than anyone else -- the stock market is the best bet I can see for taking part in technological advancement and economic growth, and I don't see a good way to hedge. But I'm sure we'll get a nasty surprise at some point.

legulere 5y ago

Growth companies all haven't shown that they can actually be profitable.