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That's a fair point, but yes, I think market cap is the best way to measure the value of a company. One problem with the "how much would you have to spend to b

That's a fair point, but yes, I think market cap is the best way to measure the value of a company. One problem with the "how much would you have to spend to buy the company" is that it gives you a much larger answer than the "how much would you collect if you sold the company," but it's hard to see why one measure should be preferred over the other. It's true that the spot price only measures the valuation at the margin, but the margin is set by the consensus of the market participants (if anyone disagrees with it, they are free to buy or sell until they agree). The price at the margin of trading also reflects expectations of the company without any change in management (which is one reason that trying to buy or sell a whole company can cost much more or less than the spot price).

jamesaguilar 13y ago
I guess what makes me so skeptical about this is the magnitude of change in expectations that relatively minor news can bring. I would say that a rational person should not, for example, value Google or Facebook 20% less or more more because of a single quarter's performance. I feel like one of three things must be the case: - A slight miss or hit of earnings expectations in a quarter really can make a rational person change their valuation of a company by 20%. - The market is irrational. - The spot price doesn't accurately represent the market. It's harder for me to believe the first two than the last one.
- jcnnghm 13y ago
  A slight miss or hit of earnings expectations in a quarter really can make a rational person change their valuation of a company by 20%. Stock prices are generally considered to be the present value of all future cash flows. In other words, growth prospects are priced in. Because of this, missed earnings can seriously effect value because they can dramatically change market beliefs about probable future cash flows and growth potential. Smaller stocks and high P/E ratio stocks (broadly, growth companies) are particularly vulnerable because the present value of future growth is a higher part of the total value. Edit: Forgot to mention, empirical data typically suggests that markets initially under-react to earnings surprises.

jamesaguilar 13y ago

I guess what makes me so skeptical about this is the magnitude of change in expectations that relatively minor news can bring. I would say that a rational person should not, for example, value Google or Facebook 20% less or more more because of a single quarter's performance. I feel like one of three things must be the case: - A slight miss or hit of earnings expectations in a quarter really can make a rational person change their valuation of a company by 20%. - The market is irrational. - The spot price doesn't accurately represent the market. It's harder for me to believe the first two than the last one.

jcnnghm 13y ago
A slight miss or hit of earnings expectations in a quarter really can make a rational person change their valuation of a company by 20%. Stock prices are generally considered to be the present value of all future cash flows. In other words, growth prospects are priced in. Because of this, missed earnings can seriously effect value because they can dramatically change market beliefs about probable future cash flows and growth potential. Smaller stocks and high P/E ratio stocks (broadly, growth companies) are particularly vulnerable because the present value of future growth is a higher part of the total value. Edit: Forgot to mention, empirical data typically suggests that markets initially under-react to earnings surprises.