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birb_cromble  6d ago (text post)   935 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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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.

Well, that's a rather quick turn from "it's a simple matter of doing some calculations with revenue and margins in your excel" to fanciful tales from the land of make-believe. If the result of your formula doesn't match the price after you've plugged in actual revenues, why even bring it up? Why is the valuation based on a fantasy scenario where all the other manufacturers are expected to fall off a cliff more correct, than one where Tesla is expected to fall off a cliff?

I don’t own tesla shares. And this is still correct finance theory. As someone who though does own a Tesla I would never own a legacy automaker car again. Maybe Tesla is too high on cash flow present value but I have no problem considering legacy autos obsolete and long term zeroing them. Tesla and legacy autos feel like completely different industries and shouldn’t be compared.

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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