Well yeah, but they arguably should be part of the valuation model. I realize there's a lot of speculation, past investment history, etc. involved in the valuation, but at some point how much money a company is making and can realistically make should be part of the figuring.
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.
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.
Valuations are generally a multiplier of yearly revenue, which makes sense. Valuations are, on paper, what you'd buy a company for, and in the old school look of things, how much the company made per year was a good metric, and you'd multiply it by several years, since you'd probably not buy it as a super short term investment.
Now, the actual multiplier values used for that... we can debate them for ages :-)
Why would the financial valuation of a company be an indication? That just means they make a lot of revenue and it's estimated they will in the future.
There's a lot wrong with this, but I'll just say that there are many more than two ways to value a company, and if you used the first type he cites (taking the net present value of future profits) you are effectively ignoring any assets the company currently owns, including IP, cash, property, plant, and equipment, short-term investments, long-term investments, just to name a few.
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.
I mostly agree, I just feel the need that valuation metrics rely on past values, which aren't as useful depending on the company you're talking about. If a company has net income X, but a new high margin product launching next month that could easily double or triple that, their P/E will look ridiculous but , in fact, be quite reasonable.
Valuation is not revenue nor any other form of money. They don't actually have $50 billion. At best you could claim the markets expect the future worth of the company be on average around $50 billion (modulo preferential stock impact, so actually a bit less).
It's always the press claiming that valuation for the whole is equal to the latest preferred share price. Companies merely say, we issued a new class of shares and raised $ at price X. Company total value = sum of each class of stock#outstandingprice$
This is how every company is valued. The point is not that the company is literally valued for some exact amount of money, but how it compares to other companies’ valuations.
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