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That doesn't address the point in the comment you replied to. He is talking about returns. The question is what return they made on invested capital. It might s

That doesn't address the point in the comment you replied to. He is talking about returns. The question is what return they made on invested capital. It might still be very good, I have no idea, but it's not the same as margin.

siwatanejo 4y ago
Wait, doesn't the invested capital equal the revenue minus the profits? That is, the expenses.
- unilynx 4y ago
  No, those have nothing to do with each other (except on the very long term..) As an extreme example, a SPAC that hasn't acquired anything yet has near-zero revenue, profit and expenses, but a lot of capital
- deleted 4y ago
  [deleted]
411111111111111 4y ago
At 60% margin your argument becomes pretty disingenuous. Sure, they're not the same but the quoted number is freely available and correlates with the returns.
hn_throwaway_99 4y ago
Thanks for posting this. I see so many comments that fundamentally misunderstand the relationship between rising interest rates and layoffs, e.g. "Many of these companies have very low debt and don't need to borrow right now, so why do they need to do layoffs?" Interest rates are the key parameter for calculating the present value of future cash flows, which is (theoretically) how companies are valued. When interest rates go up, those present values go way down, to the point where they're no longer competitive with risk-free investment options.
- skrebbel 4y ago
  But why does that matter? Why does a wildly profitable company need to compete with “risk-free investment options”? Why do they need to be an investment option at all? Obviously I’m not understanding something very basic about finance here, but I don’t see how “profitable company is not more profitable than a loan would be” implies layoffs.
  - kijin 4y ago
    The only reason DigitalOcean exists is because people have invested money in it. But those people have every right to invest their money elsewhere if they see a more profitable option, such as U.S. treasury bonds. As a result, DigitalOcean needs to compete with loans, not just other cloud computing companies.
  - csomar 4y ago
    That's how the current economy works.
  - hn_throwaway_99 4y ago
    > Why does a wildly profitable company need to compete with “risk-free investment options”? The shareholders are the owners of the company. Their ownership stake is referred to as shareholder's equity, and the company's net income divided by this equity is called return on equity. Now, if you're a shareholder, and you've determined that your return on equity in this company is lower than, or not all that much better than, the risk-free rate of return, what is the rational thing to do (economics-wise)? Shut down the company and put all your money into Treasuries. Why would you leave your money in a company, that has all the risks associated with the ups and downs of business, when you can just park it in a risk-free option (though, of course, Congress in their grand stupidity is trying to change that "risk-free" designation at the moment, but I digress...)? I think often times when you wonder "why does the economy work like this?", it's really helpful to put yourself in the shoes of a company owner. What are their incentives and competing options?
    - skrebbel 4y ago
onlyrealcuzzo 4y ago
The value of future earnings vs current earnings is all that matters. Nobody wants income. They want capital gains. Corporate profits are a necessary evil in the way to extracting out lower-taxed capital gains. When interest rates go up, the value of future profits goes down, and the value of current profits goes up. This means, if you're the CEO of DigitalOcean, and all you care about is the stock price... You fire people so you have more current earnings so your stock price goes down less, so 1) your pay goes down less, and 2) your shareholders are happier. That's pretty much it.

siwatanejo 4y ago

Wait, doesn't the invested capital equal the revenue minus the profits? That is, the expenses.

unilynx 4y ago
No, those have nothing to do with each other (except on the very long term..) As an extreme example, a SPAC that hasn't acquired anything yet has near-zero revenue, profit and expenses, but a lot of capital
deleted 4y ago
[deleted]

411111111111111 4y ago

At 60% margin your argument becomes pretty disingenuous. Sure, they're not the same but the quoted number is freely available and correlates with the returns.

hn_throwaway_99 4y ago

Thanks for posting this. I see so many comments that fundamentally misunderstand the relationship between rising interest rates and layoffs, e.g. "Many of these companies have very low debt and don't need to borrow right now, so why do they need to do layoffs?" Interest rates are the key parameter for calculating the present value of future cash flows, which is (theoretically) how companies are valued. When interest rates go up, those present values go way down, to the point where they're no longer competitive with risk-free investment options.

skrebbel 4y ago
But why does that matter? Why does a wildly profitable company need to compete with “risk-free investment options”? Why do they need to be an investment option at all? Obviously I’m not understanding something very basic about finance here, but I don’t see how “profitable company is not more profitable than a loan would be” implies layoffs.
- kijin 4y ago
  The only reason DigitalOcean exists is because people have invested money in it. But those people have every right to invest their money elsewhere if they see a more profitable option, such as U.S. treasury bonds. As a result, DigitalOcean needs to compete with loans, not just other cloud computing companies.
- csomar 4y ago
  That's how the current economy works.
- hn_throwaway_99 4y ago
  > Why does a wildly profitable company need to compete with “risk-free investment options”? The shareholders are the owners of the company. Their ownership stake is referred to as shareholder's equity, and the company's net income divided by this equity is called return on equity. Now, if you're a shareholder, and you've determined that your return on equity in this company is lower than, or not all that much better than, the risk-free rate of return, what is the rational thing to do (economics-wise)? Shut down the company and put all your money into Treasuries. Why would you leave your money in a company, that has all the risks associated with the ups and downs of business, when you can just park it in a risk-free option (though, of course, Congress in their grand stupidity is trying to change that "risk-free" designation at the moment, but I digress...)? I think often times when you wonder "why does the economy work like this?", it's really helpful to put yourself in the shoes of a company owner. What are their incentives and competing options?
  - skrebbel 4y ago

onlyrealcuzzo 4y ago

The value of future earnings vs current earnings is all that matters. Nobody wants income. They want capital gains. Corporate profits are a necessary evil in the way to extracting out lower-taxed capital gains. When interest rates go up, the value of future profits goes down, and the value of current profits goes up. This means, if you're the CEO of DigitalOcean, and all you care about is the stock price... You fire people so you have more current earnings so your stock price goes down less, so 1) your pay goes down less, and 2) your shareholders are happier. That's pretty much it.