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> Amazon is not the only company that is plowing back all of its incremental profits into growing its business. This is very common for enterprise software comp

> Amazon is not the only company that is plowing back all of its incremental profits into growing its business. This is very common for enterprise software companies as well. Salesforce has made or lost a small amount of money every year for the past four years but it has grown its revenue from $1.3bn to over $3bn in those four years. And its market value has gone from $12bn to $32bn in the same time frame. Workday hasn't made any profits in the last four years, in fact the net losses have been increasing. But the stock has doubled in the past year and the Company is now worth almost $14bn. It's amazing to me that folks in the Silicon Valley/VC world continue to look at the performance of publicly-traded tech companies and for some reason never seem to consider that, as deserving of premium valuations as some of these companies may be, much of the crazy price action of the past several years has been driven by the Fed. You can't seriously look at the charts of companies like Netflix and Tesla and believe that this is the result of DCF analysis. > If you believe, as Amazon management does, that the future growth is going to be there for Amazon, then you ignore the current P&L and think about what a future P&L might look like. > If you think that Salesforce and Workday can continue to grow their revenues at or near their current growth rates, then you ignore the current P&L and think about what a future P&L might look like. How about this: if the Fed balance sheet continues to go up and to the right, ignore fundamentals, pick momentum stocks and think about what their future charts might look like. It doesn't take a lot of imagination: up and to the right. Of course, when the fun ends, "profitless prosperity" will indeed be profitless for the folks who didn't cash out in time.

oscargrouch 13y ago
Is that sort of party where only the big sharks win, and all the others small fish lose? "Dont run small fishs, they dont know what they are saying, they are lunatics, stay with us and put your money here, we know better"
tbarbugli 13y ago
I am not sure I really get what you say (probably due to my ignorance in this matter), could you elaborate bit more the 'driven by the Fed' part ?
- 001sky 13y ago
  The present value of future cash flows are driven by a maths formula. In essence, NPV= FCF/(1+R)^t. R is being driven to zero by the fed. As R->0, NPV goes up. This is true for all levels of FCF.
  - yetanotherphd 13y ago
    Are you really claiming that investors are implicitly assuming that the current interest rates will continue forever when they value companies which promise high future cash flows?
    - 001sky 13y ago
      Not relevant. http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf
      - yetanotherphd 13y ago
        I should probably just ignore such a dismissive reply, but here goes: It is relevant because your claim is that investors are over-valuing the future cash flow of companies like Amazon, because they are using the current 0% interest rate to compute the NPV of these companies. However, a smart investor would, like you, predict that the current interest rates will not last forever, and so will not use a formula for NPV that implicitly assumes the current interest rate will last forever. You can't just point to the "standard" definition of NPV and somehow claim that this automatically leads to wrong valuations by investors. please give future comments as arguments, not links. While my PhD is in economics, not finance, I'm familiar with the mainstream literature. I'm not saying I'm 100% right all the time, but if there is disagreement between us, it isn't because I lack basic education in the field.
        001sky 13y ago
        Broadly speaking, the only critical element is as follows: Investors are using a <directonally lower> discount rate.[1,2] _________ [1] The purpose of fed policy is to effect such marginal change. The rest is simple, no need to overthink it. [2] The term structure of interest rates discussion linked above will only reinforce this point.
nrao123 13y ago
Are you suggesting that if Fed stopped QE1/2/3 , then discount rates would go up & therefore the DCF valuation will come down? But- if one did a sensitivity analysis for changing discount rates & valuation - it wouldn't be the key driver for high growth companies like Facebook & Tesla. Damodaran has done a somewhat detailed analysis on TSLA & FB & changing discount rates don't seem to be a big factor in valuation. http://aswathdamodaran.blogspot.com/2013/09/valuation-of-week-1-tesla-test.html?m=1 http://aswathdamodaran.blogspot.com/2013/09/valuation-of-wee...
- adventured 13y ago
  The stock market would crash if the Fed stopped QE. Every time there has been even the mere talk of tapering or an end to QE coming - no actual tapering has ever occurred - the stock market tanks. Wall Street parties every time they get confirmation QE is going to continue. Every headline on CNBC et al. tends to track specifically what the Fed is going to do regarding their debt monetization and housing inflation programs. Immediately after it's confirmed the Fed will continue to devalue the dollar and inflate assets with low interest rates and QE, the stock market spikes higher. This has been the pattern for years now.
yetanotherphd 13y ago
There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to all stock prices, and in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying.
- 7Figures2Commas 13y ago
  > There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.
  - yetanotherphd 13y ago
    If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.
pbreit 13y ago
I think you need to explain, or at least mention, how the Fed's behavior is significantly responsible for the charts of companies like Neflix and Tesla. I'm not sure I see why/how this is the case.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- adventured 13y ago
  Tesla and Netflix, as two examples, are high risk, high valuation, low fundamental stocks, with a classic technology bent (tech companies often get the benefit of a high valuation because it's believed by investors that they produce very outsized profit results eventually). When money is cheap, it pursues high risk investments for outsized returns. Institutional investors in fact push for such, in a race to keep up with the returns their peers are seeing during periods of very large stock market gains. Investment funds pursue ever higher risk investments for higher returns, in a competition for capital. For the most part, all money and all investments compete in a global market place. Very few investors have the will power to sit on the sidelines while others are making fortunes riding bubbles (eg the late 1990s, 2004 > 2007). The Fed's policies are specifically aimed at making money cheap right now (and they've succeeded; see corporations issuing debt at almost zero cost, such as AAPL and MSFT). Whether we're talking the cost of a mortgage, or the POMO shots boosting the stock market, or the indirect asset bubble effect from money chasing risk to compensate for the lack of interest yielded from cash, and on and on it goes.

oscargrouch 13y ago

Is that sort of party where only the big sharks win, and all the others small fish lose? "Dont run small fishs, they dont know what they are saying, they are lunatics, stay with us and put your money here, we know better"

tbarbugli 13y ago

I am not sure I really get what you say (probably due to my ignorance in this matter), could you elaborate bit more the 'driven by the Fed' part ?

001sky 13y ago
The present value of future cash flows are driven by a maths formula. In essence, NPV= FCF/(1+R)^t. R is being driven to zero by the fed. As R->0, NPV goes up. This is true for all levels of FCF.
- yetanotherphd 13y ago
  Are you really claiming that investors are implicitly assuming that the current interest rates will continue forever when they value companies which promise high future cash flows?
  - 001sky 13y ago
    Not relevant. http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf
    - yetanotherphd 13y ago
      I should probably just ignore such a dismissive reply, but here goes: It is relevant because your claim is that investors are over-valuing the future cash flow of companies like Amazon, because they are using the current 0% interest rate to compute the NPV of these companies. However, a smart investor would, like you, predict that the current interest rates will not last forever, and so will not use a formula for NPV that implicitly assumes the current interest rate will last forever. You can't just point to the "standard" definition of NPV and somehow claim that this automatically leads to wrong valuations by investors. please give future comments as arguments, not links. While my PhD is in economics, not finance, I'm familiar with the mainstream literature. I'm not saying I'm 100% right all the time, but if there is disagreement between us, it isn't because I lack basic education in the field.
      - 001sky 13y ago
        Broadly speaking, the only critical element is as follows: Investors are using a <directonally lower> discount rate.[1,2] _________ [1] The purpose of fed policy is to effect such marginal change. The rest is simple, no need to overthink it. [2] The term structure of interest rates discussion linked above will only reinforce this point.

nrao123 13y ago

Are you suggesting that if Fed stopped QE1/2/3 , then discount rates would go up & therefore the DCF valuation will come down? But- if one did a sensitivity analysis for changing discount rates & valuation - it wouldn't be the key driver for high growth companies like Facebook & Tesla. Damodaran has done a somewhat detailed analysis on TSLA & FB & changing discount rates don't seem to be a big factor in valuation. http://aswathdamodaran.blogspot.com/2013/09/valuation-of-week-1-tesla-test.html?m=1 http://aswathdamodaran.blogspot.com/2013/09/valuation-of-wee...

adventured 13y ago
The stock market would crash if the Fed stopped QE. Every time there has been even the mere talk of tapering or an end to QE coming - no actual tapering has ever occurred - the stock market tanks. Wall Street parties every time they get confirmation QE is going to continue. Every headline on CNBC et al. tends to track specifically what the Fed is going to do regarding their debt monetization and housing inflation programs. Immediately after it's confirmed the Fed will continue to devalue the dollar and inflate assets with low interest rates and QE, the stock market spikes higher. This has been the pattern for years now.

yetanotherphd 13y ago

There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to all stock prices, and in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying.

7Figures2Commas 13y ago
> There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.
- yetanotherphd 13y ago
  If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.

pbreit 13y ago

I think you need to explain, or at least mention, how the Fed's behavior is significantly responsible for the charts of companies like Neflix and Tesla. I'm not sure I see why/how this is the case.

gbrindisi 13y ago
Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
gbrindisi 13y ago
Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
gbrindisi 13y ago
Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
gbrindisi 13y ago
Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
gbrindisi 13y ago
Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
adventured 13y ago
Tesla and Netflix, as two examples, are high risk, high valuation, low fundamental stocks, with a classic technology bent (tech companies often get the benefit of a high valuation because it's believed by investors that they produce very outsized profit results eventually). When money is cheap, it pursues high risk investments for outsized returns. Institutional investors in fact push for such, in a race to keep up with the returns their peers are seeing during periods of very large stock market gains. Investment funds pursue ever higher risk investments for higher returns, in a competition for capital. For the most part, all money and all investments compete in a global market place. Very few investors have the will power to sit on the sidelines while others are making fortunes riding bubbles (eg the late 1990s, 2004 > 2007). The Fed's policies are specifically aimed at making money cheap right now (and they've succeeded; see corporations issuing debt at almost zero cost, such as AAPL and MSFT). Whether we're talking the cost of a mortgage, or the POMO shots boosting the stock market, or the indirect asset bubble effect from money chasing risk to compensate for the lack of interest yielded from cash, and on and on it goes.