I was curious about something. I know a company issues shares to raise money to expand for example. But if the Market Cap is the total value of a publicly traded company's outstanding common shares owned by stockholders, Question: how is a company allowed to just issue a share amount to raise whatever amount they want? Are bonds involved in the issuing of shares in some way? in other words, if a company is only worth $50 grand, and they went to raise $100 million to expand, how is that all determined and approved? I don't really understand the process.
I don't fully understand the details, but it's important to remember that market cap is the value placed on the company BY THE BUYERS OF ITS STOCK. Nothing more, nothing less. It may - or may not - have any correlation to what the ACTUAL VALUE of the company is. Another imperfect valuation tool is BOOK VALUE. It's main value to me is in comparing it to all the other valuation criteria, such as market cap, EPS, P/S, P/E, etc. NOT necessarily in that order. That's a good starting point toward answering your question....
I'm not sure I should share my perspective, as it has zero respect for the SEC or established protocols. It's kind of dark. A company is not allowed to expand without limit. At least, in theory. In reality, there are no limits due to a combination of straight up corruption and group think. The detail I've watched companies go public. It's curiously imprecise. Any occurrence of imprecision is an opportunity for corruption. An auditor comes in and values the company. This is the number used for the IPO. The thing is, the auditor is being paid by the corporation. Corporate valuations are a bit of a black art so the IPO is always really high. Keep in mind, they are allowed to speculate on future value. It's insane. A company with a CapEx of 1B has a market value of 1B, by definition. This is not the companies intrinsic value. Intrinsic value is directly connected to future cash flow. How can anyone quantify that? It isn't possible. In some ways, the market is a better estimator of corporate value than an auditor. At least, on balance. But, the market gets it wrong all the time. Look what happened at Nikola. There are an infinite number of examples of the market being pessimistic, overheated, or just dumb as hell. It's still better than most auditors, though. If someone at D&T were to come in and accurately value a company, they would probably be fired. They have that position because they are "optimistic". In other words, they will incorrectly over-estimate corporate value 100% of the time. But, it's far, far worse than this. After IPO, there is a lot a corporation can do to raise money. The corporation can apply to issue new shares to raise funds for a new venture. Perhaps Ford wants to create a new marque to build millions of EVs, sell them for next to nothing, and put Tesla out of business. They could easily push that through and sell $5B of stock to use as a war chest. They would have some obligation to actually create the new marque, or they *might* get in trouble, but the new brand can fail and it won't be a problem. In this example, what would matter is that a lot of people think Ford could easily drive Tesla out of business and it would probably be pretty easy to sell $5B worth of $FEV stock. Remember, they will have to pre-sell a certain level of stock to successfully IPO. If they don't, it doesn't happen. The threshold is probably around 80% of expected value of the new venture. Of course, that expected value is someone's fantasy. This does not mean they can only sell the new venture at 80% of expected value. It means the deal is killed if it's below 80% but they can sell all 100%. When is the last time an IPO failed? They used to fail all the time. It wasn't easy to IPO, back in the 80s and mid 90s. By the late 90s, IPOs were succeeding all the time. By 2010, few people could recall the last time an IPO failed. In this way, an IPO itself is a bit of an audit. It requires enough people believe in the project for it to succeed. Of course, there are several million people who believe the US never made it to the moon so it's not much of a a check or balance. In the case of Nikola, the company lied, misrepresented a mock up as a prototype, got caught, CEO was found guilty of fraud, and legions of people were still saying, "Buy the dip! This is the next Tesla!" on various investing forums. The answer to your question First, you need some franchise value. Perhaps your name is "John Ford". If it isn't, legally change it. Next, start a corporation named, "Ford Next Gen Batteries Truth Non-Scam". Put $50K into the corporation. It can come from anywhere. Whatever you do, don't put your own money into it. I mean, come on... Promise people they are getting in on the ground floor of a company that will return 100x of their money in less than 4 years. You will not get into trouble. Spend the money on a web site and glossy brochures showing a shiny object of unusual shape. Add some text indicating your battery is going to put Tesla out of business. Mention you will make power so cheap and affordable, it will not be metered. Circulate these things. Try to get on some local news programs. If you look good and your presentation is polished, you might get picked up nationally. Next, IPO. It costs money to IPO but take the $50K you stole from the morons and go to the bank for 2x more leverage. A $100K operating line is surprisingly easy to get. You must do this before you squander the $50K, which you will surely do. Use the $100K to finance the audit and valuation exercise that is required to IPO. Remember, you will have spent $150K by the time you reach IPO so 100% of your IPO will be fictional corporate value. Once you have the $100M, you are going to need to spend some on batteries. Buy a few hundred cells from LG Chem and solder them into unusual shaped configurations. They need to look interesting and compelling. Don't forget to paint them. Over the next three years, you will pay executive bonuses amounting to $80M. Don't worry, you will get the other $20M also but that will be base salary. If you are really good at creating buzz in the media, you may be able to get a contract or two. With contracts to sell $2B of batteries to Ford or GM in four years time, you have $2B of cash flow so you can return to the market to raise another $2B in a second IPO. GM has taught us it isn't difficult to sell a false promise to a major corporation, even if you are comically incompetent at what you do.
Very entertaining. Not without truth, but not exactly gospel, either. What can I say? I've always been a fan of noir. But I usually prefer Hammett or Chandler.
I was an employee of a corporation that went public and did some contract work for a second corporation that went public. Someone from Deloitte got a bit buzzed one night and blew my hair back with a peek under the kimono. He was trying to evangelize the process, saying "Our valuations are surprisingly accurate." after explaining some surprising details of the black art.
Great and genuine response Tom, thank you! I do know what book value is at the basic sense of Assets minus Liabilities, or is it + Liability's. lol. One of the things I look at when buying a value stock is how close the market price is to the book value, or even better if it's undervalued. But I know it's not the full story as you said. Then you get into long term assets and the devil gets hidden in the weeds. But as you mentioned regarding appraisal, I guess it's never that straight forward. I think I over looked that when I posted this. I've read what you said about shady evaluation in a accounting coarse I watched. I guess at the end of the day, appeasers are like layers. On an unrelated off topic note. I've got some Penney stocks in my portfolio, I look at them as lottery tickets. Unlike a scratch off, as long as the company is still around, a lot can happen. But I never just buy penny's because someone says to. I also use screeners and find ones with decent P/Es and ROE's, and even look at things like how many employees there are..ect, things that meet my filters. They are gambles, but I feel like the 99% of people that loose on them never used a screener or do evaluations. The other challenge is, if they have not been around a few years, you can't really evaluate things like the PEG, or revenue growth. Anyway, great post Tom. I appreciate your response! The evaluation of value kind of reminds me of how special interests and earmarks work. You creat a problem, set an earmark over budget, all the collage kids say, "Yahh, go green" and then politicians pocket the rest surplus.
You have this, CB. I just crapped on the entire market and I stand by it, however, I think the topic is slightly more delicate than that. How would you value a company that is nothing more than idea? The odd one of these companies make it big. Sometimes, they even deserve to make it big. Like Rambus? They are basically a patent troll that is now valued at $5B. How would you value Tesla at IPO? The correct value should probably have been -0.5B. They were all debt and zero income and yet they have done OK. If they had been valued at $0 and disallowed to IPO, they would not have been able to finance the most epic industrial expansion effort since WWII. Financing business is literally what the stock market is about. It wasn't intended to be about gambling, although that is how everyone views it these days. So, the process is corrupt and lousy but I don't have any magical solutions. I know that you will get burned, if you trust market valuations. You will also not succeed if you are always pessimistic.
Na, I think you were just trying to be honest. And I think you hit it head on. As far as how I would value a company that's just an idea. I kind of did that when I bought my first stock 15 / 20 years ago, Jamba Juice. I didn't know what I was doing, just knew enough to place a market order..lol, but I heard on the radio that week that they merged with Nessely and I just used my speculative senses to make a judgment. A new owner took over Jamba - some football player and their cooperate was not returning a call. It pissed me off so I sold the shares at a 36% gain. Then two months later they tanked. I guess I got lucky, but I only has $500 in there so. As far as the present day: About two years ago I started sitting on my patio smoking cigars with my laptop and just trying to learn as much as I can about valuing company and anything related to monetary policy, interest rates..ect. I've download some courses videos on accounting, Udamy, and even have the Warren Buffet value investing videos. All great stuff. But where I'm at now is, I'm try to better understand the income, balance and cash flow statements.I've learned a lot, but have a long way to go and it don't end there. I realize these valuation methods are not a magic key to the full truth. But like anything, when I look at a company, I'm just trying to find as many pieces of the puzzle as I can to see the big picture. I've been using Think or Swim to monitor sector's and industry's and their movements with respect to the economic cycle. Its pretty wild how you can set a a watch list for every sector and put the top 20 or 30 holdings in that watch list - holdings you got from highly rated ETFs. I've got columns setup to see the 52 week ranges, the book value, ROE..ect all in real time. I just wish I didn't have to work and I could sit home and watch them like my friend who's worth about 4 mill..lol. Guy throws $1.6 Mil at a 1 year T bill @ 5.5% and makes $88 grand. Sick.
