Valuations are also based on future potential (or lack thereof) as well. If a company is currently having a great quarter but there is news that might impact their next quarter, you can bet their stock will drop before their financials even take a hit. It works both ways.
Obviously based on their current financials this valuation is absurd, but given how fast they have grown and how many companies have picked up their product, I would put my money on them justifying this valuation in the future.
An investor earning a return generally requires that present value does not account for all of the future profits. The parent I replied to claimed the exact opposite, that a valuation is based on all future profits.
For the investor ideally none of the future profits are captured in the present valuation. It's the battle between that position, and the company's desire to get as much capital for its equity as possible, that reaches the valuation.
The problem is, this is not true. Look at the history of the stock market. There's a whole science about "Valuation". Like all sciences it has a long history and it evolves.
It has evolved, a lot over the years. And with it, the prevalent valuation of companies has changed, likewise by a LOT (generally going up, by a lot).
So you'll have to be more precise? There are many valuation philosophies, from Nprofit, to value of the physical assets of a company, Nrevenue, Discounted cash flow analysis, Growth stock ... which "reality", exactly, do you mean?
Some people even see the "in the end, we're all dead", as the "reality" at the end of the stock market. Eventually, they're probably right.
No, pulling into the current valuation all the future profits is not the point of a valuation. If you did that, there would be no return to ever be had for the investors.
Under that premise, Facebook should have been valued at $200 billion at their IPO (or even earlier).
Google should have been worth $300 billion at their IPO in 2004.
Apple should be carrying a $20 trillion market cap using that calculation, pulling all of their future profits into their present valuation.
Investors do not normally reach a valuation for an investment today, based on profits ten years from now, with the expectation that the price paid today is equal to what the profits in ten years will justify. That's a recipe for not yielding any returns for ten years.
The point of a valuation is to invest capital into a company based on speculation of future returns to be yielded based on future profits, not to pay for all of those future profits with your investment today. The value is determined by the near-present estimation of what the business is worth, and with a potential bias elevating the valuation. The investor return comes from all of those future profits not being priced into the current valuation.
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