Positive feedback loop-value thing?

Investment Analysis Clubs Saul’s Investing Discussions
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Yeah, I know - too much conversation about value, but I can’t get it ff of my mind.

I’ve always looked at shares of stock as being a representative portion of a business.

The way that seems to make the most sense, to me at least, is to add the book value of a company’s assets (insignificant in most of the companies discussed here) to the current value of the stream of net profit expected over a reasonable time horizon.

The area under the curve is a function of its slope which is a function of both the growth in volume and the maintenance/growth in profit margin.

While “stickiness” is a good thing, it doesn’t modify the graph upwards, but rather prevents competitors to cause its decay.

Looking at things this way seems to me to be a rational way to arrive at the current value of a share of stock. Since we’ve agreed here that macroeconomic factors (such as the current dumping of funds by the Fed each night under the name of repo, rather than QE) shouldn’t be discussed, it’s hard to add this factor as an accelerant to stock prices, in general, in a discussion of value here.

Since the burn rate of cash, the growth rate of sales and the gross profit margin are all reported, the only missing factor to consider is how the net profit per share will be calculated into the project-able future.

While the SAASS stocks are a new category, unless somehow cumulative net profit no longer dictates value, it is important to think long and hard about how much of the future profit implied in current pricing reflects macroeconomic factors, “greater fool” pricing, acceptance bias or technical trading strategies which have little to do with eventual pricing.

There has been a general expectation that the stocks frequently discussed here will consistently increase in value over time. This, would be a wonderful thing, but it is frequently dependent on the market (except us) mis-pricing the shares.

Of course, the above might be completely bogus and there may be a new way of computing the implied value of a share of stock. If so, I would greatly appreciate being shown the error of my ways.

If, on the other hand, this board is simply about exchanging news about symbols without relation to whether they are fairly priced or not, then I apologize for, once more, starting a threat about discussing value again.

Jeff

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The way that seems to make the most sense, to me at least, is to add the book value of a company’s assets (insignificant in most of the companies discussed here) to the current value of the stream of net profit expected over a reasonable time horizon.

Feel free to give it your best shot and discuss a specific company. Several of us have done this, and it usually leads to some fruitful discussion of the assumptions that go into any model.

Bear

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I’m surprised people are still using book value to price companies. Even many manufacturing companies can outsource production, sell their manifacturing plants and equipment, and buy back shares with the proceeds and have lower book value but better economics or higher EPS in the long run. This has been going on since the 1980s. And look at the prices of your typical contract manufacturer. Very low profit margins, very low price ratios.

And with software companies there are no assets to speak of that actually show on the balance sheet. They are making a non physical product and their “equipment” goes home every day.

The widely acknowledged method to value Stocks is the net present value of future earnings. Which is impossible to do on these startups. People can try, but they’re just guessing.

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