Cake
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    • I think company valuation is nuanced, depending both on the nature of the company itself, its business model, and the current financial environment.

      Historically, mature profit-making companies trade at about 15X to 18X earnings (not revenue) in normal market conditions with normal interest rates (5% to 7%) and such. Today, however, mature zero-growth companies like AT&T and Exxon Mobil trade a bit higher than that at 18X (AT&T) to 21X (XOM) earnings. But they pay 5%+ dividend rates in a zero-to-negative interest rate environment, so high dividend-paying stocks will get bid up.

      Similarly, mature software product companies traditionally traded for about 4X revenue. Software companies have great margins - zero cost of goods sold - but revenue and earnings are frequently lumpy, tied to software upgrade cycles. Enter the subscription SaaS business model, which makes earnings highly predictable, boosting revenue multiples to 6X to 10X and beyond. Back in the day, only anti-virus companies used subscription models, but today, Microsoft, Adobe, Quicken and everyone else are moving or have moved to the subscription model.

      We also live in a time where many newer companies are in winner-take-all markets due to network effect or other exogenous conditions. For example, we all gravitate to a handful of social media companies such as Facebook and Instagram (also owned by Facebook), operating system companies such as Microsoft, Apple and Google (Android).

      What are fast growing, network effects, near monopoly companies worth? Clearly way more than companies with lower barriers to entry, so fast growing, network effects companies get much higher bids.

      In the old days, it took decades to build a network effect, winner-take-all companies such as the phone company AT&T and the utility companies. But with today's Internet companies, these competitive contests are settled much faster, taking years instead of decades to sort out.

      As a entrepreneur, what would you do if you had a growing network effects company? I'd gobble up a bunch of capital and grow as fast as I possibly could without the wheels flying off, and that's exactly why you see companies staying private much longer.

      Take sticky shopping cart companies such as Shopify, Square and Wix. While they theoretically have a lower barrier to entry, shopping carts are sticky; no merchant wants to swap out their shopping cart and catalog once it's been integrated into their website. So, it's a race to acquire as many customers as quickly as possible, and because of this rapid growth, valuations get bid up. You might scratch your head why earnings-less companies are so valuable, but in winner-takes-most businesses, it all makes sense.

      For years, Chipotle Mexican Grill could recoup their investment in "A" model stores - the most common format they use today - in about 10-12 months. With economics that compelling, as CEO you'd reinvest every nickle of profit into new stores, which is exactly what they did (until the e-coli scare). Zero earnings, but stores and revenue growing like gangbusters and a market cap reflective of that growth.

      As an investor, I've trained myself to investigate companies with sky-high valuations on the theory the market is telling me something. A good percentage of the time, you'll find a very fast-growing company.

      We live in a time of great innovation and business models are evolving...

    • I had a finance professor in college who boomed from the front of the class: YOU CAN'T BEAT THE PROFESSIONALS WITH THEIR COMPUTER ALGORITHMS AND CONTACTS WHO DO THIS FULL TIME!! And then he went on to explain indexing.

      When I see stunning rises like Tesla just experienced, leaving some very smart and pretty well organized short sellers completely burnt, I wonder how regular schmoes like us are supposed to make sense of it?

    • There's an old saying that winners keep on winning! Tesla was beaten down to ~$30B market cap for quite a while, so any good news was bound to send the stock up, which is exactly what happened when they reported their second profitable quarter in a row. If you follow Tesla on Seeking Alpha, the stock commentary website, nearly all posts and comments were so negative for so long that the safe bet was probably to do the opposite. People forget that Tesla generated $25B in revenue last year, which is huge, and it also has to be said that Tesla, exclusively, is setting the agenda for the entire automotive industry. [Full disclosure: I have owned TSLA stock for several years.]

      Fortunately, individual investors have several key advantages over professional investors.

      First, individual investors don't have to report quarterly performance like the pros. Fund managers can experience significant asset outflows if they don't beat their benchmark index; individuals don't have that problem, allowing them to focus on a company's long term prospects. Most private equity hedge funds report on a monthly basis now, so they're forced to focus on how a stock is going to perform over the next few weeks. They don't have the luxury of focusing on performance over the next several years like individual investors can.

      Second, individual investors can ignore volatility (price fluctuations) whereas professional investors can't. Google missed consensus revenue. Dump that dog! ... ignoring the fact they reported $46B+ in quarterly revenue and are growing at a 17% annual rate, which is amazing for such a huge company. They're literally a $1 Trillion market cap company with $160B+ of revenue, growing 17% annually, and professional investors are selling.

      Third is window dressing. Professional fund managers buy and sell stocks at quarter's end to improve the optics of what they report. Individual investors don't, and can easily ignore most fluctuations. A few months ago, no respectable professional investor would want Tesla appearing in their quarterly portfolio report; owning that loser would imply you're a loser too! Now, every pro wants Tesla in their portfolio, implying they saw the rebound coming before everyone else.

      Fourth is professionals manage much larger amounts of money than individual investors, restricting the size of companies they can invest in. Warren Buffet has stated many times he could substantially boost his investment performance if he didn't have so much money to invest; he's restricted to only large- and mega-cap companies. Individual investors can invest in small, high growth companies that are too small to move the needle for professional investors.

    • I'd like to see a cogent, data-driven argument which finishes the sentence: "Tesla is valued at $150B because ..."

      FWIW, my two tweets on this topic (valuing Tesla is outside my wheelhouse):