Personally, I think that valuing businesses by their expected growth is doing really bad things to our society.
We used to value businesses by their current returns, usually dividends paid to shareholders. And we treated any statements about their future plans as interesting but not something anyone should trust.
Now we value stocks on what their price will do in the near future, because the primary return to shareholders is an increase in share price, effectively speculation rather than dividends as the method of returning value to shareholders. So we're incentivising companies to be constantly pushing their share price up (rather than paying decent dividends), which does bad things to both the company and the economy as a whole.
It's not how the system was intended to work and we find ourselves on a treadmill of constant growth that is killing everything good.
Valuing anything by its expected, long term value is just accurate. You'd consider the longevity of, say, a garment when you purchase it. The fact that a car has a lot of miles in it, and therefore will need replacing earlier, is something that any reasonable person will consider with its valuation. We spend money educating children not because of the value of the knowledge that second, but the expected value in the future, including how it'll be useful to learn other things.
So of course we price businesses based on the expected long term value of the shares, as best as we can guess it. But the fact that a company degrades in value as it "overgrows", and engorges itself to become an entity that can't innovate or do anything efficiently in itself goes into the price too. It's not as if a place like IBM doens't want to grow: We just know they won't.
As for speculation rather than dividends, I suspect the real medium why this happens isn't just need for infinite growth: Again, as growth expectations slow down, price moderates: See Paypal vs Stripe. The issue is mroe of a principal-agent situation, as it's very difficult for the median shareholder to, say, force Zuck to stop spending money on the metaverse. And it's not just at the top level: We have a lot of incentives in organizations for people to push for more hires, even when there's very little value to be had. Anyone with a long career can see how much less tense a growing company is that one that has decided its headcount is stuck for a long time, or possibly shrinking.
Principal Agent problems are just much more annoying to put a blame on, because instead of being able to blame some exec all on their own, we get to look at ourselves too, and how what is good for us differs so much from what is good for employers too. The blame is spread thinly, and the behaviors that would lead to more efficient companies are also worse for workers. Then it's suddenly people easier to like, and we don't like where "try to be profitable at the most optimal size" takes us.
Isn't it much simpler than that? Dividends and profits are taxed. Reinvesting to grow revenue isn't. That's why you see companies doing stock buybacks; prevents them from paying taxes, prevents their shareholders from paying taxes.
When humans are involved the waters are pretty muddy and the forecasts of possible growth rosier than reality. Seeing companies losing money hand over first while those same companies get insanely high valuations is common enough that these are obviously short term money grabs before the house of cards collapses.
Imagine valuing Google in early 2000s on its revenue and dividends. It would have nearly zero value, but if you bought then you knew it was going to be one of the biggest companies in the world.
Only boring stable companies that have no growth like Coca-Cola make sense only valuing without further growth.
So speculative fiction, making this basically gambling since the entropy for picking a "winner" is so high. For every Google there's a hundred others that had similarly brilliant ideas that either flopped or failed to monetize. Your anecdotal example is just retroactive survivorship bias.
Agree, but Coca-Cola has plenty of value despite being "boring" and "stable".
The post I was replying to was saying that SpaceX had no growth and therefore little value. That's a mindset that sees companies as speculative assets that are only valuable if their price is set to change in a way that a speculative profit can be made.
SpaceX is making money and doing well, the business fundamentals are working out, and it is valuable because of that. If it turns into a boring, stable, company then that's a good thing - it's less likely to spend $10B of shareholder funds chasing some sci-fi pipe dream (instead of, say, spending $1B testing its assumptions first) in the hope of continuing to be valued as a "high-growth" stock.
Coca Cola indeed has a lot of value its market capitalization is USD 76 billion making it one of the 30 most valuable companies in the world!
The problem with SpaceX is that its valuation is almost entirely driven by its expected future growth. For 2025 SpaceX reported EBITDA of USD 7.5 billion. Other mature aerospace companies (Lockheed, Northman, Airbus, Boeing etc.) are currently valued as ~19x EBITDA (i.e., Market Cap / EBITDA is ~19x). But SpaceX is being valued at 166x EBITDA (USD 1.25 trillion market cap / USD 7.5 billion EBITDA).
What drives this difference in valuation? The answer is quite simple, investors expect the EBITDA to grow and quite rapidly. EBITDA could grow via higher margins (EBITDA margins is EBITDA / Revenue, and for SpaceX it is already a decent 50%), but even at 100% EBITDA margin (i.e., zero operating cost) its valuation multiple would b 83x EBITDA. So the only way to justify SpaceX valuation is if its revenue grows and gorws rapidly.
A quick back of the envelop calculation would shows that investors expect SpaceX revenue to grow at minimum of 65-70% annually for the next 5 years. If the revenue grows at less than that the investors are unlikely to earn a good return on their investment.
Someone else here pointed out that when your biggest asset is a network of thousands of satellites that all have a five-year lifespan, earnings after depreciation is unusually important.
But they made up a bunch of forecasts with rosy future prospects! Think of how profitable they'll be if literally the world model matched their simple growth equations!
From my perspective, it's all just collective gambling when it comes down to it for tech IPOs these days. The market trends are just as much a popularity game as they are anything else.
I agree - I think there should be a rule that prevents anyone who buys a stock from selling it inside the following 2 years or so. And another rule that says every stock must pay a dividend that is a fixed percentage of the company's profit, modifiable only rarely and only by the board of directors. Then anyone buying stocks would have to price them more by the actual present-day dividends and strength of the company in the present day than by what someone else might buy the stock for tomorrow. It would curb speculation and reward responsible companies that are building strength for the long term.
People have been speculating on future returns since forever.
The East India company (an example of capitalism gone very very wrong) was speculatively founded with £4m (in today’s money) and went on to corner half of global trade.
This rose-tinted past of honest capitalism did not exist.
I like your term "honest capitalism". I'm putting that in my back pocket for later.
Capitalism breeds monopolies by rewarding first movers with economic advantages via feedback loop. This is how the system is designed to work, always has been, always will be.
You’re free to invest that way if you want. You might one day wake up and wonder why your Blockbuster Video shares did so badly. But Netflix seemed way overpriced.
Investing in future prospects encourages companies to plan for the future, rather than extract what they can from the present. The stock price is a big motivation for execs, so they can only invest in R&D if the market understands why it makes sense to spend money now in expectation of future profits.
The fact that capitalist systems require unbounded growth for "success" is the real society killer, but crazy valuations is definitely a concrete symptom of this as we reach growth limitations; we're now pushed to "just assume" that the growth is still plausible when it's clearly not to keep the status quo.
We used to value businesses by their current returns, usually dividends paid to shareholders. And we treated any statements about their future plans as interesting but not something anyone should trust.
Now we value stocks on what their price will do in the near future, because the primary return to shareholders is an increase in share price, effectively speculation rather than dividends as the method of returning value to shareholders. So we're incentivising companies to be constantly pushing their share price up (rather than paying decent dividends), which does bad things to both the company and the economy as a whole.
It's not how the system was intended to work and we find ourselves on a treadmill of constant growth that is killing everything good.