5 ms·

actually, market cap === valuation

001sky 13y ago
FYI, valuation is defined as enterprise value, not market cap. And in general, things like liquidity discounts and control premia also mean market cap is a poor proxy for acual or fungible value, even for the equity. The reason is that the marginal price of the equity is not the average price (in terms of market depth). simply multiplying a market that is 1-2% deep @ p=X x 100% of shares outstanding is flawed from the perspective of suplly and demand. these comments are made by others in the thread elsewhere, but worth repeating.
- JumpCrisscross 13y ago
  Enterprise value is an M&A metric. As an equity holder, equity value is the valuation of concern. Market cap is generally the best estimator of equity value. Takeover value, equity value in the event someone wants to own all (or a controlling part of) the equity, is a different beast. It includes the strategic optionality that comes with owning a company. Having to take what management doles out thus produces a different equity value than takeover value. Market cap is the best estimate of this passive investor's equity value.
waps 13y ago
Isn't that the efficient market hypothesis ? Which, when you read it, I'm sure you can come up with 10 counterexamples (obvious counterexample: ponzi schemes). I guess you could call me a disbeliever.
- pyrrhotech 13y ago
  Value is what the market is willing to pay for it--for anything, not just companies. The EMH says that that value is always discounted perfectly on a risk-adjusted basis of all current knowledge about the company. Therefore if a company exceeds its risk adjusted expected performance in the future, it wouldn't be possible to predict beforehand.
mikeash 13y ago
That might technically be what the word means, but the implication is that this is what the company as a whole is worth, and that's not necessarily true. A stock's price is essentially the first derivative (in calculus terms) of the company's value. Market cap is essentially assuming that the entire thing is linear, by taking the derivative and multiplying it by the total size. Stocks don't behave linearly, so this assumption isn't particularly good.
nicholas73 13y ago
No, market cap = # of shares * last traded price. It's what the last bozo believed the value was, which varies widely depending on the bozo. Then you have the bozos who are trying to guess what the other bozos will do. At some point the market cap will be right, but only for an instant.

FYI, valuation is defined as enterprise value, not market cap. And in general, things like liquidity discounts and control premia also mean market cap is a poor proxy for acual or fungible value, even for the equity. The reason is that the marginal price of the equity is not the average price (in terms of market depth). simply multiplying a market that is 1-2% deep @ p=X x 100% of shares outstanding is flawed from the perspective of suplly and demand. these comments are made by others in the thread elsewhere, but worth repeating.

JumpCrisscross 13y ago
Enterprise value is an M&A metric. As an equity holder, equity value is the valuation of concern. Market cap is generally the best estimator of equity value. Takeover value, equity value in the event someone wants to own all (or a controlling part of) the equity, is a different beast. It includes the strategic optionality that comes with owning a company. Having to take what management doles out thus produces a different equity value than takeover value. Market cap is the best estimate of this passive investor's equity value.

waps 13y ago

Isn't that the efficient market hypothesis ? Which, when you read it, I'm sure you can come up with 10 counterexamples (obvious counterexample: ponzi schemes). I guess you could call me a disbeliever.

pyrrhotech 13y ago
Value is what the market is willing to pay for it--for anything, not just companies. The EMH says that that value is always discounted perfectly on a risk-adjusted basis of all current knowledge about the company. Therefore if a company exceeds its risk adjusted expected performance in the future, it wouldn't be possible to predict beforehand.

mikeash 13y ago

That might technically be what the word means, but the implication is that this is what the company as a whole is worth, and that's not necessarily true. A stock's price is essentially the first derivative (in calculus terms) of the company's value. Market cap is essentially assuming that the entire thing is linear, by taking the derivative and multiplying it by the total size. Stocks don't behave linearly, so this assumption isn't particularly good.

nicholas73 13y ago

No, market cap = # of shares * last traded price. It's what the last bozo believed the value was, which varies widely depending on the bozo. Then you have the bozos who are trying to guess what the other bozos will do. At some point the market cap will be right, but only for an instant.