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birb_cromble  6d ago (text post)   931 thread views

Weekly Finance Thread (without clever alliteration)

A weekly thread to discuss financial matters - from personal all the way up to global.

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The conspiracy parts of the internet (i.e. the most entertaining parts) are freaking out about the SpaceX IPO and changes to various market indices that will be Bad News. This seems to the background. The S&P500 is not one of the indices, though, according to that link. Anything to it, or usual internet financial panic?

SpaceX is an overpriced unprofitable business and the type of fuckery Musk has done to push it into big indices is incredible, but the fact that literally everyone and their dog is aware of this makes me think it will be a non event. Some people are predicting SpaceX IPO to be a liquidity vacuum and the claim is not baseless, but again - literally everyone is aware of this and is salivating for things (ie semis and other shiny stuff) to go down because SpaceX is gonna print like 100 new billionaires and thousands of millionaires in the next 6 months thanks to insane valuation and fast unlock schedule. What's more likely to happen is all these guys waiting for a dip get left on the sidelines, coping that next big IPO, which I think is Anthropic, is what tips the market and gets them a good entry

The only reason Musks can do fuckery to push it into indices is because a lot of people want to buy the stock and will let him IPO 50+ billion at a 2 trillion valuation.

He personally will likely not cash out much in the IPO. And it really is a great company I would love to buy at some point. I am likely hoping that the mess up the IPO like Meta and I get to buy it between $500b and a trillion. Starlink has potential to be a cash flow machine. xAI is interesting but I have no idea if frontier models will be profitable and it’s going to burn a ton of cash. And SpaceX innovation is insane.

I won’t buy the IPO though unless I see an opportunity arb the indexes but I would really like to own it someday.

The bigger issue isn’t the etf inclusion it’s an issue that our biggest companies don’t go public now because of regulations (complicated). It should have been listed years ago. Valuations on it are tough but it’s obviously a very valuable company.

And it really is a great company I would love to buy at some point. I am likely hoping that the mess up the IPO like Meta and I get to buy it between $500b and a trillion.

It is, but not at $2 trillion, or even $1t.

our biggest companies don’t go public now because of regulations (complicated)

Are you sure this is the reason? I haven't researched much but it seems more like it's just +EV for them to milk the private markets for all they have and only then IPO and milk public markets.

Morningstar is valuing SpaceX at around $780B. Do you think that's fair?

Just based on the S-1, I'd put it somewhere between $600B and $750B.

How is one supposed to go about answering that question? As far as I can tell the stock market is voodoo, and there is no "correct" value for a company.

We have this technology called excel. You then estimate revenue and margins for the next ten years. After that you general take the tenth year cash flow and assume it grows at the rate of nominal gdp forever.

Then take the 10 year interest rate in US treasuries and add a risks premium like 3.5%. Then use some function in excel that takes the cash flows in my first paragraph and discount every year until then at like 8% (4.5% + 3.5%) per year.

This will give you the current stock price. Due to the efficient market hypothesis whatever price you see in your brokerage account should be + or - about 5% of what your excel gave you.

So if we apply this formula to, say, Tesla, do we get it's current price? From what I understand, it's worth more than all the other auto companies combined, so either it's overvalued, or they're undervalued. With that in mind, what does it mean for the price to be "wrong"? What's supposed to happen if the "efficient market" doesn't get the price "right"?

Terminal Value Calcs. I think I simplified and said you just project 10 years of cash flows and then throw on a terminal growth rate. If the market is efficiently pricing then it’s basically assuming legacy automakers are whip and buggy manufacturers that don’t have a terminal growth value and instead terminal growth is negative.

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With that in mind, what does it mean for the price to be "wrong"? What's supposed to happen if the "efficient market" doesn't get the price "right"?

That depends significantly on the reasoning why one thinks that may be the case. The unfortunate part is that it's about the same level of impossibility to know for sure that you've gotten that reasoning right as it is to know for sure what the underlying value of future cash flows is.

That said, if we are allowed to handwave a bit, it has been suggested by far greater financial minds than I (e.g., Matt Levine), that some stocks are sometimes priced above the current value of their future cash flows because of memes (e.g., Gamestop). If that's the case, then one would expect that the price would follow the dynamics of memes, which may or may not be at all similar to the dynamics that one would expect the price to follow if one thought that it was primarily being priced by more 'traditional' concerns. What is "supposed" to happen depends significantly on things like, for example, how long one thinks that it will primarily follow the dynamics of memes or whether that component will eventually disappear and such.

Obviously, there are many directions that any company may end up taking, and there could be many different underlying reasons why a (slightly-modified) "reasonably-efficient market" doesn't get the price "right". For example, a company may be engaging in fraud, and perhaps the vast majority of market participants are unaware of this fraud. What has sometimes happened in the past in such cases is that the company runs out of money, suddenly declaring bankruptcy and surprising everyone by telling them that their shares are a claim on $0 worth of shareholder equity. In other cases, an external party discovers the fraud, and as that information spreads through the market, many people want to sell, but no one wants to buy, and the price quickly collapses. Other dynamics can occur if there are other factors.

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