how donyou make sense of stock valuation?
when I look at companies like Shopify and Chegg etc, I just can’t make sense of the current valuation. Shopify’s market cap is at 84b while its annual revenue is 1.6b. So if Shopify grows 10x tomorrow, and if it incurs 0 cost, you make your investment money back in 5 years? are people stupid or am I stupid?
People are stupid. Those valuations are based on growth, and because there is no market to back them, they don't get the other negative pull from an open market. Private lenders are easier to dupe than an open market because the people making those risks are doing it with other people's money
Shopify is public tho
Well, street once valued uber at 120B
Yes it’s probably too high. But it’s about 8x revenue va Shopify at 50x revenue.
There are more things you need to factor in other than revenue. Let’s say the company has no new revenue and hey want to liquidate. How you want to do the valuation? You have to take consideration of the tangible and intangible assets, cash equivalents, liabilities, goodwills, etc. Now, add back the revenue/earnings numbers.
Good point. Although I like to take goodwill out of the picture since that’s almost impossible to give a fair value. Most tech companies don’t have a lot of hard assets so I’m also hesitant to think they worth that much.
Most of the technology companies has intangible assets which are far more valuable than tangible/hard assets. With the tangible assets the value grows slowly, but intangible assets grows faster. Intangible assets include parents, branding, technology, products knowledge, source code, customer data, analytics data, etc.
You can say the same thing for any stock you pick on random. Fundamentals are no longer driving the stock market. Don't ask me what is driving though... :) My guess is dollar cost averaging ETF investing with out any consideration to underlying.
Not true. Many stocks are within more reasonable bound. Amazon is 5x revenue Facebook about 6x. It’s no where close to 80x like Shopify.
I love Shopify stock. I made over 200% return on it in the past 9 months or so!
And assuming you did research on it instead of just dumb luck, what do you think of it’s valuation?
Of course a part of it is dumb luck. My research was mostly on the adoption of Shopify and the ever increasing sales. I’ve been a user of the service myself so I have an idea. Did I expect a profit on my investment? Yes. More like 20-30%. Definitely not 200%. That was just dumb luck.
You look at their revenue, growth, and debt. Tesla is valued a lot higher than other car companies because believe or not, Tesla has a great balance sheet. And a lot less debt than GM and Ford. Also the money from ev subsisdies is added to their balance sheet as free cash flow.
I’m trying to use this market cap/revenue as an initial filter. Tesla is at about 6x which I think is within very reasonable bound. But at what point does it become unreasonable? 20x? It’s back to the same theory, it doesn’t make sense how much assets the company own, its about return from capital.
You buy Tesla at this valuation at their growth estimation in 5 years, I follow Cathie wood on Twitter. She does a good explaining it. I don’t own Tesla btw, I use to. https://twitter.com/CathieDWood
OP if you are still around, your apprehension has been validated!
This isnt how companies are valued, especially growth companies in tech. Not saying the valuation is reasonable, just that the market looks at growth rate and future potential. Explain Tesla valuation....its because people think they are going to own the future of well whatever. Shopify might be the future of commerce in the markets' eyes (or maybe it wont.)
I know people are pricing in growth. That’s why my assumption is 10x growth realized tmr. It still doesn’t make sense to me. And if the next 5 years of growth is priced in, how irrational do people need to be to think it will still go up? And how many company can keep a growth rate of 50%?