<<<Back then I pointed out to my friend that they lost money on every book they sold. He asked how they made money. I said “Volume, volume, volume!” ;-)>>>
I remember back at MBA school, a discussion was had as to how Amazon could have such a high valuation as it had exceeded $30 billion and then some in market cap. This was 1999 or so.
One answer was that Amazon is building out a business model that can scale faster and cheaper than any retailer before it ever could, or will be able to in the future.
The other was you cannot value it on earnings, but on value. Do you value a diamond, or a great work of art based upon how much it earned in the past year? No. You own those items based upon how much it will be worth in the future. So you had to value Amazon based upon what its business would be worth in the future. And sure enough, Amazon is still building that business, and therefore you still cannot value Amazon based on earnings.
Turns out in retrospect, and of course the “smart” money was only justifying things and never invested and held, both reasons were exactly correct, and is still correct.
Good lesson for other investment opportunities as well. One that comes to mind is Netflix. Oh the crap Netflix took for its high valuation based upon earnings. Tesla is another such business at present.
If it is a business that is building a franchise, then it is building its asset year after year after year, making itself more valuable every year.
Is Shopify that sort of business? Twilio? Zen? UA? SKX? Not saying yes or no to any of those, just pulled those two from the hat as my mind is too distracted with other things to pull current smaller cap examples. But I do think that is one reason the conventional wisdom gets these companies all wrong. They look at earnings and forget a growth business is about growing its asset, called the end value of the business, not about building cash flow for one year. Thus, why a high P/E or none at all is often simply answering the wrong question. And that is without any new economics, or justifications, it is simple economics.
Tinker