"Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is valued by taking the last share traded and multiplied by the number of shares outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL."
Indeed. And Pets.com was worth $100 million on the day of its IPO. And tulip bulbs were worth more than a man's annual salary in 1637. And that house down the street was worth a million dollars last year. Someone paid for those, too.
You don't have to have a different definition of "valuation" to see that a small sample of the most eager investors in the private market doesn't guarantee a reliable estimate of value.
Value is determined by what someone- anyone- will pay for something. And it makes sense if you think about it. The goal is to find out how much you can sell that something for and it is the exact same problem as figuring out how much someone will pay for that something.
Company valuations are messier than tulip bulb valuations though. With tulip bulb valuations you are saying that since someone will pay x the bulb is valued at x. With company valuations you are saying that since someone will buy 1/n of the company for x then the company is worth n*x. This makes sense because people really want a piece of facebook and valuations do a great job of setting that price. But the price is also used to determine how much the entire company will go for, which is how the number is often thought of.
As long as the valuation goes up and you have the opportunity to sell for a net gain then it is a good investment. DHH's thoughts here are important beacause they call attention to a valuation bubble. I think the main controversy lies in his creative use of words.
> Value is determined by what someone- anyone- will pay for something.
Not "someone", but THE MARKET ... when you buy a piece of Facebook, but won't be able to sell at least at the same price, then you're the loser ;)
When multiple losers gather and start buying stupid shit with no value to THE MARKET, that's called a BUBBLE, that will burst sooner or later.
The trick for estimating if "the valuation goes up" is to see if that company actually provides value (i.e. actual profits, since that's the only goal of a company) ... and in that light, DHH's opinion makes a lot of sense.
Right. But unless you think there's someone (or a set of someones) who would pay 33B for all of Facebook, it's not unreasonable to assert that it's not worth that much.
Indeed. And Pets.com was worth $100 million on the day of its IPO. And tulip bulbs were worth more than a man's annual salary in 1637. And that house down the street was worth a million dollars last year. Someone paid for those, too.
You don't have to have a different definition of "valuation" to see that a small sample of the most eager investors in the private market doesn't guarantee a reliable estimate of value.