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Comment by 7Figures2Commas | Hacker News Reader

Salesforce is worth $30 billion and has no earnings. Amazon is worth $143 billion and has no earnings. Facebook, with a ~$120 market cap, is valued at more than 200 times earnings. Tesla's market cap is roughly a third of Ford's.

As long as the Fed is easing, fundamentals don't matter. The mispricing in equities is particularly pronounced in prominent technology companies, but there is clear excess throughout the market.

The name of the game is momentum. This game will end, and badly, but questioning the market and fighting the Fed has not been the path to profit so keep in mind that, right now, Twitter's bottom line is practically irrelevant.

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Come on, don't lump those together.

* 75% of CRM's float is sold short, market clearly agrees with you * AMZN has big FCF numbers, 2012 being an anomaly because of the big fixed capex expenditures. They grow the business without regard to engineering their GAAP earnings, which is admirable, and means the EV/FCF is probably a big, though somewhat reasonable 25-50. * FB analysis requires a DCF because they're growing earnings so fast. They're only 40 x estimated 2014 earnings * TSLA is not the same business model as F or GM, though they all nominally sell cars. Look at the leverage around licensing revenue that ARMH or QCOM showed.

I haven't read Twitter's S-1 and can't comment on it (50 x revenue makes it feel closer to CRM than any of the others), but I generally agree with your opinion that equities are near a peak because it is literally impossible for fixed income to be less attractive as an alternative and the Fed is clearly letting us know it's closer to the end of QE than the beginning. (disclaimer: nobody should make investment decisions based on my advice, I'm not a professional and you could lose all your money if you do, etc)

EDIT: after perusing the S-1 the revenue growth rate is incredible, so it may end up more like FB (which has only surpassed it's ipo price in the last month or so...)

EDIT 2: Yahoo!'s short data was laughably wrong, CRM's percent of float sold short is 10%

> after perusing the S-1 the revenue growth rate is incredible

Well, one could also say that the growth rate of their cost base is incredible too.

Salesforce, Amazon, Facebook and Tesla may all be great companies that deserve aggressive valuations based on any number of factors. But if you truly believe that you can determine what a reasonable premium is in a market that is so influenced by central bank action, I tip my hat to you because you're much smarter than many of the people who do this for a living.

> I generally agree with your opinion that equities are near a peak because it is literally impossible for fixed income to be less attractive as an alternative and the Fed is clearly letting us know it's closer to the end of QE than the beginning

Just to be clear: I didn't state any opinion as to whether we're close to a peak or not, and based on what we've seen in the past month, I wouldn't use the word "clearly" in any sentence referencing the Fed's plans to end QE. The Fed is between a rock and a hard place, and while I think certain scenarios are more likely than others, I'll just say this: the only thing that would surprise me is if there are no more surprises.

Fair enough, I didn't mean to put words in your mouth.

But I'd be curious at what price you're be willing to pay for Twitter shares based on the filing.

I don't ignore fundamentals, but for non-dividend paying issues, I trade primarily on technicals. As such, I have no interest in Twitter shares and almost certainly won't any time soon, if ever.

would you mind walking back through that and explaining the acronyms and the meanings. I can google things like FCF is Free cash flow, but understanding that? much harder

A quick note (since I'm on my phone) until someone posts a better reply: ev/fcf is a financial ratio you can use to compare how much you are paying for various companies (idea being that similar companies should sell for roughly similar ratios). DCF takes all the cash a company will ever make and tells you how much you should pay for that now. Basically, there are a lot of ways to value a company and some methods are better suited for a given stage in a company's life than others (for example, many methods fall apart when a company has no earnings or has negative cash flows).

Sorry, most of those are ticker symbols (AMZN, FB, CRM, TSLA, F, GM, ARMH, and QCOM).

Other than that, QE is quantitative easing; EV/FCF is enterprise value divided by free cash flow, which can be a useful ratio sometimes (company has a lot of cash/equivalents or lots of non-cash charges lowering earnings); and DCF is discounted cash flow, which the sibling comment explains well.

Free Cash Flow, conceptually, is the total amount of cash you would have from the company's operations as a single owner of the company in a given year.

The importance of free cash flow lies in how capital investment (buying buildings, factories, or other companies, among other things) is treated.

When a company invests money, it doesn't count against the company's profit. It is just treated as one asset turning into another asset.

/BUT/, if a company is essentially /required/ to invest money in new capital to keep the business going (think capital intensive businesses like oil exploration), as an owner you have to budget that you'll need cash to invest in new things, reducing the amount that actually comes to you.

That hit doesn't show up in profit or revenue, but it does show up in free cash flow.

thanks to all replies

Regarding the Fed and the economy, that is very true. Paul Krugman recently did a column where he suggested that there was no good way for the USA economy to move forward:

http://krugman.blogs.nytimes.com/2013/09/26/trade-and-secula...

He first suggests that we have possibly become dependent on unsustainable bubbles:

"Leaving aside the large surplus just after World War II, we went from persistent small surpluses before 1980 to persistent large deficits after 1980. This meant that we needed more domestic demand, other things equal, to achieve full employment — and arguably that we needed a series of bubbles and rising leverage, which are no longer forthcoming."

then he suggests a possible way out:

"And you might therefore argue that we can avoid secular stagnation by letting low interest rates lead to a debased dollar (hi, Congressman Ryan!), more competitive U.S. manufacturing, and balanced trade."

but then he casts doubt on the possibility of there being any way out:

"Or maybe not, because who exactly is supposed to be on the receiving end of our improved balance?"

As he has suggested in a series of recent blog posts, we might be facing a very long era of stagnation.

What's the mechanism for QE having a particularly acute affect on technology company valuations?

You can value an equity based on it's discounted future cash flow discounting by a risk-free rate (typically US 10 yr notes). QE is the Fed making large purchases of t notes on the open market to keep the rate low, in order to keep capital cheap (and ostensibly encourage investment). If they stop these purchases there is a widely held belief that the t note rates will increase, which will hurt the equity premium across all companies. You can play around with any number of free online DCF calculators to see how varying the risk free rate of return effects current valuations.

edit: I am addressing the general question, not ipo valuations.

Anybody who thinks that IPO pricing is done by DCF.....

It isn't, but it's a convenient model that holds true on average.

What people actually do is say: "oh, crap...I can't make money in fixed-income securities. I guess I'll dump my retirement in stocks instead." This flood of money eventually makes its way to the riskiest stocks and props up high valuations.

> This flood of money eventually makes its way to the riskiest stocks

Citation needed.

The same way it makes it to every other stock. People buy them, looking for returns.

Do you happen to understand why QE isn't suppose to increase the money supply? My understanding is the treasuries are bought by increasing the balance of a commercial banks federal reserve account. Can't the banks draw on that account?

The amount of reserves in the system are fixed by the Fed. Reserves can be moved from bank to bank, but the total amount in the system remains the same.

What did the government use to buy back treasuries and where did it come from?

>If they stop these purchases there is a widely held belief that the t note rates will increase

The only people calling for a crash when rates return from "historically low" to just plain old "low" are those that depend on these low rates.

It never ends well when you pile in at historical minima/maxima.

>As long as the Fed is easing, fundamentals don't matter.

Can you point to a metric, besides the obviously flawed Cape-Shiller, that shows the stock market is anywhere near a point where fundamentals "don't matter"?

>This game will end, and badly

Will it? I think it's already ended well, preventing us from going into a deep depression.

In general, valuation reflects anticipation of future potential, not present performance. This is what's called "investment."

So this is a good idea, until the Fed decides that it's not a good idea.

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