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Higher interest rate was the catalyst to recognizing reality, not so much a fundamental shift of financials. Many of these companies were losing money and thei
by cudgy 4y ago
Higher interest rate was the catalyst to recognizing reality, not so much a fundamental shift of financials.
Many of these companies were losing money and their future imaginary positive cash flows were wishful thinking given their business models. Higher interest rates accelerated loss in value as the speculative sentiment shifted to a more risk-averse posture once the market accepted the reality that was always there: these companies never exhibited the ability to make any money, plus they were cannibalizing themselves due to the extreme competition from other startups fueled by the huge amounts of money vc’s were able to gather during the zero interest rate mania.
Discounting future negative cashflows was always a foolish game.
- sokoloff 4y agoI think changing interest rates can easily (and often do) cause a fundamental shift of financials. If I have a company that will lose 100 units of currency this year and next year, break even the year after that, and then return 20 units of currency for each of the next 17 years, then vanish without a trace, that's worth positive 46 units of currency at a 3% discount, nothing at a 5% discount, and negative 37 units of currency at a 7% discount rate. (Whether you discount the initial losses changes the analysis by only a small amount.)
- cudgy 4y agoDiscounting of cash flows is not what I consider to be “financials”. Financials are the output / cash flows themselves not the speculative investment calculation of future flows given a determined discount rate. Initial cash flows weigh much more heavily than later cash flows, so initial losses in a cash flow series have a much larger impact on npv. Therefore, I disagree with the conclusion of your hypothetical.
- twelve40 4y ago> these companies never exhibited the ability to make any money the most talked-about layoffs right now are happening at salesforce, facebook, amazon, etc. I'm not sure what you are trying to convey or which hypothetical companies you are talking about, but these are printing money.
- cudgy 4y agoMy analysis is not limited to the “most talked-about layoffs” (whatever that means) nor is it limited to some cherry-picked old cash-cow behemoths that are going to have much slower growth rates going forward. Possible exception is Facebook if they can make the VR bet work, but I have serious doubts about VR being commercially profitable within the next 20 years and even more doubts Facebook will be the company to make this happen.