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0 pointspluma6y ago0 comments

I'll never understand what market cap has to do with company size. Stock prices are basically an arbitrary value mostly determined by how much people buying stock think the stock is worth, are they not?

Correct me if I'm wrong but theoretically an overhyped two man operation running at a financial loss could generate the same market cap as a much larger company with massive profits? As I understand it, the only somewhat tangible factor is the actual money in the company which again can be bloated by overeager investors.

I'm not being facetious, I'm genuinely curious about the rationale.

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andrew_n6y ago

Market capitalization = share price * number of shares

As a first approximation, this is how much money it would cost to buy all the shares. You’d pay $SHARE_PRICE for each share and then own the entire company. Therefore the concept is a decent measure for what the market has decided the company as a whole is worth.

A company with 10x the market cap of a competitor is considered 10x bigger, because it would take about 10x as many dollars to acquire.

I say “first approximation” because if you actually tried to buy all the shares on the open market, then increased demand would drive the price up, and not everyone would want to sell right away. In an acquisition, the acquirer offers a deal where all shareholders get, say, 1.25x the current share price, but only if all shareholders sell all their stock. And the board of directors of the company being acquired can compel all shareholders to do so, if that’s in the best interest of the shareholders.

plumaOP6y ago

I understand how valuations work but I guess where I'm confused is that people on HN seem to conflate market value with size or even revenue.

After some googling it seems that my intuition about the relevance of stock prices is mostly right:

https://eu.usatoday.com/story/money/columnist/krantz/2012/10...

> If the stock price falls, these investors lose money, not the company.

The stock price is entirely speculative and detached from the company's actual performance. At best it's informed by a perception of the company's performance and an expectation of how the stock price might change in the future in reaction to the company's future performance.

While shares will be worthless if the company goes bankrupt, the company won't be directly affected if the stock market plummets -- except in situations where (additional) stock can be used as a currency in lieu of actual cash, like buying out competitors.

So to answer my own question: market cap (but mostly share price really) is only a measure of company size in so far as it indicates how much money the company could generate by selling additional shares. It doesn't provide any indication of how well the company is doing financially, how many employees it has, how much market share it serves or any other measure of size BUT generally people are willing to pay more for shares of companies that are likely to grow or at least outperform their competitors in the short term.

EDIT: In other words, yes, an overhyped two man operation running at a financial loss could end up with a massive market cap but in practice it's unlikely to happen because hype rarely works that well.

calgaryeng6y ago

"Enterprise Value" is one of the legitimate measures of company size, and is defined as market capitalization + net debt.

You can think of this as equivalent to the size of the company because it would be the amount of money you'd need (roughly speaking) to buy the entire company outright.

brianpgordon6y ago

Don't forget to subtract cash in the EV formula. Otherwise you could take out a gigantic loan and magically get bigger, when really all you've done is shuffle some money from debt into cash.

Radle6y ago

Well if your company only has one product with all the secrets leaked on github, it matters whether the company was worth 10 Million or 6 Billion before bad things happen.

kitd6y ago

Among other things, market cap gives an indication of the future value investors place in the company. Your 2-man shop would unlikely have a similar market cap unless they can demonstrate some blindingly simple strategy to take over the world. Your big corp already has access to a large userbase (100m users in Bilibili's case if the previous poster is to be believed). That makes future growth and profits much more likely.

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