Ask HN: Why are we so bad at valuing public companies?
5 comments
Key phrase: "future cash flows"
And it is actually future profits. Revenue moves all over the place, as do expenses. Toss in comparison to prevailing interest rates. You have 3 variables.
These are then in turn influenced by social desires, competitors, and regulation.
What is surprising to many people is companies desire to have more regulation as it reduces competition.
Social desires is why companies advertise.
Therefore if you have a long term contract to advertise on a TV show that now becomes the MOST popular show ever ....
And then of course there is the new regulation which will cost you a dollar per product, but will kill off any new startup as they do not have the resources to address it ...
Oh and the rain fall in Cuba has ruined the crop for a key component of your product driving your costs up, but your competitor gets the component from Chile ...
And it is actually future profits. Revenue moves all over the place, as do expenses. Toss in comparison to prevailing interest rates. You have 3 variables.
These are then in turn influenced by social desires, competitors, and regulation.
What is surprising to many people is companies desire to have more regulation as it reduces competition.
Social desires is why companies advertise.
Therefore if you have a long term contract to advertise on a TV show that now becomes the MOST popular show ever ....
And then of course there is the new regulation which will cost you a dollar per product, but will kill off any new startup as they do not have the resources to address it ...
Oh and the rain fall in Cuba has ruined the crop for a key component of your product driving your costs up, but your competitor gets the component from Chile ...
“The intrinsic value of a company is the net present value of all future cash flows.
Technically the share price shouldn’t change then”
It’s the expected net present value (possibly decreased by some amount for the variance in that expectation)
That value can change depending on (semi-)random events such as tsunamis (Fukushima nuclear power plant), CEOs stepping down, presidents being elected, competitors entering the market with a better product, etc.
Also, humans are bad at determining that expected value. Even events that have only a minor effect on that value can have a large effect on the perceived value.
Technically the share price shouldn’t change then”
It’s the expected net present value (possibly decreased by some amount for the variance in that expectation)
That value can change depending on (semi-)random events such as tsunamis (Fukushima nuclear power plant), CEOs stepping down, presidents being elected, competitors entering the market with a better product, etc.
Also, humans are bad at determining that expected value. Even events that have only a minor effect on that value can have a large effect on the perceived value.
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The value of a company or anything else is just based on supply and demand. "estimated future cash flows" just influence the demand and supply of the stock.
Share is an asset traded on a dynamic market. Share price is so much more than just a representation of the company's financials. There is no reason to think that markets are efficient when share price is based on dividend.
The intrinsic value of a company is the net present value of all future cash flows.
Technically the share price shouldn’t change then. The behavior of seeking long term capital growth in share price appreciation implies that the companies are perpetually undervalued.
Yes, market forces are what ultimately determine the actual share price, but if the stock market worked efficiently there should be no money to make from price appreciation and the only incentive being dividend.
So if a company doesn’t pay you the prevailing interest rates for a dividend they are saying “our stock is undervalued right now” and you should expect greater dividend in the future.
This also entails that some companies that failed were actually worth zero.
But as we get better at predicting things shouldn’t this concept of capital gains through stock appreciation taper off eventually?