If a company is burning through cash, you are going to be diluted, and that factors into the price you should be willing to pay for shares.
Disagree! It all depends on how the company is using the cash. If it is “burning through cash” for no good reason, you would be right. But if the cash is used to grow the business, increase revenues, and increase profitability, then there is no dilution. If you get twice the business for twice the money, there is no dilution. Marvin Minsky explained bad debt vs. good debt.
Factoring it into my risk/reward framework. Less confidence in the future of NoSQL increases the risk in my mind, therefore requiring a lower price before I feel comfortable buying. If I were more confident in the technology, I would be more confident buying in at a higher price.
Absolutely but my question was the dollar amount of that confident price. How do you calculate it? I use charts, when Mr. Market is bullish, I buy.
Thanks for the discussion on NoSQL.
My pleasure!
Denny Schlesinger
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Disagree! It all depends on how the company is using the cash. If it is “burning through cash” for no good reason, you would be right. But if the cash is used to grow the business, increase revenues, and increase profitability, then there is no dilution. If you get twice the business for twice the money, there is no dilution. Marvin Minsky explained bad debt vs. good debt.
It’s a relative thing. I’m not saying that it is wrong to go into debt to grow a business, or that one should avoid investing in businesses that do so. I’ve made that clear. All I am saying is that, relatively speaking, its better if the money you are investing into your debt comes from profits, rather than debt. This is about comparing valuation between companies, which is only part of an investing decision. We are growth investors, which means we look at growth primarily, but we still consider valuation secondarily.
For example, CRWD seems much cheaper than DDOG on a p/s basis. Both are investing heavily in growth. But CRWD’s GAAP operating losses mean more dilution is likely happening in CRWD than in DDOG, who is close to breakeven. This narrows the valuation differential.
GAAP matters when looking at valuation, which is of secondary consideration to growth investors like us. I don’t think I’m saying anything controversial, and I think this is getting off topic, so I’d like to end it here.
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