It's important to understand that as an asset class, public equity has a certain tolerance for unpredictability and risk (lower tolerance compared to venture or

It's important to understand that as an asset class, public equity has a certain tolerance for unpredictability and risk (lower tolerance compared to venture or growth capital). Very predictable, mature industries like utilities, industrials, and certain financial institutions offer relatively stable cashflow through thoroughly understood revenue streams -- and thus they benefit from a generally lower level of volatility. Technology firms on the other hand (Facebook being a great example) have great elements of unpredictability, along with high potential for growth, two conflicting forces that factor into stock price. Take, for example, Amazon. In its recent earnings announcement, Amazon posted a loss on net income of $274 million. If Amazon replicated this result in perpetuity, it would soon be a bankrupt company. Amazon's EPS is 0.07 cents per share, giving it a price to earnings ratio of over 3,000. If you purchased Amazon at its current price and if Amazon replicated this result in perpetuity, it would take 3,000 years before you were paid back on your stock. Now of course that's a silly analysis when you don't take into consideration growth and expected future cash flow. Clearly investors factor in a tremendous amount of growth in many large technology companies. However, investors are not prescient. They need indicators on the likelihood of this future growth, so factors like ad sales, product sales, new product growth, etc are extremely important. Any major shifts either above or below their expectations changes their growth estimates. Since a significant portion of their purchase price is going into future growth, any changes to growth estimates will have a magnified impact on valuation (i.e. price they're willing to pay). Is there some speculation going on? Probably. But the mere act of investing in the public equity of certain technology companies is a form of speculation. And there's far more to how markets are made than can be distilled in a short article, especially if we try to generalize the forces at play.