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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

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
  Really appreciate the hand-holding here. One thing I don’t fully get yet, is that you say that if the DO return on equity is lower than that of a government loan, the shareholders should just dissolve the company. How is dissolving the company going to get them their money out? They’ll get only a tiny sliver of their original investment back, right?
  - creamyhorror 4y ago
    They're not quite right. They won't dissolve the company. What happens is that market participants sell their holdings of the company's stock (since they want to free it up to buy bonds with higher returns), causing the stock price to fall. Eventually the price theoretically reaches an equilibrium level where it's worth what it should be relative to the risk-free interest rate (with a risk premium factored in). Whichever participants were still holding company stock will have seen the value of their holdings shrink as a result of this price fall. So what do company executives do? They cut costs (staff and investments for the future) to improve their operating profit, which directly equates to justifying a higher stock price - thus lessening the fall in the stock's price. They're being compared to peers/competitors, too. What if they don't do this? Shareholders (often big funds) won't be happy (because their own portfolio value will fall and they might lose bonuses or get fired), and some will call for the CEO to be replaced by someone who will do the job. That's the magic circle of life on Wall Street.

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
Really appreciate the hand-holding here. One thing I don’t fully get yet, is that you say that if the DO return on equity is lower than that of a government loan, the shareholders should just dissolve the company. How is dissolving the company going to get them their money out? They’ll get only a tiny sliver of their original investment back, right?
- creamyhorror 4y ago
  They're not quite right. They won't dissolve the company. What happens is that market participants sell their holdings of the company's stock (since they want to free it up to buy bonds with higher returns), causing the stock price to fall. Eventually the price theoretically reaches an equilibrium level where it's worth what it should be relative to the risk-free interest rate (with a risk premium factored in). Whichever participants were still holding company stock will have seen the value of their holdings shrink as a result of this price fall. So what do company executives do? They cut costs (staff and investments for the future) to improve their operating profit, which directly equates to justifying a higher stock price - thus lessening the fall in the stock's price. They're being compared to peers/competitors, too. What if they don't do this? Shareholders (often big funds) won't be happy (because their own portfolio value will fall and they might lose bonuses or get fired), and some will call for the CEO to be replaced by someone who will do the job. That's the magic circle of life on Wall Street.