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Formerly worked in Investment banking: it is a huge huge determinant of value. Particularly for a lower-dividend, higher growth company like Nvidia, the vast m
by ttt333 5y ago
Formerly worked in Investment banking: it is a huge huge determinant of value.
Particularly for a lower-dividend, higher growth company like Nvidia, the vast majority of the present value comes from the terminal value (what someone else will pay you for it when you're done holding the investment), made even more extreme by low interest rates.
- richardwhiuk 5y agoCouldn't it transform into a high-dividend company?
- JumpCrisscross 5y ago> Couldn't it transform into a high-dividend company? This is cigarette-butt investing. It ignores terminal value. If the terminal value is already close to zero, it's the right move, an orderly wind-down and re-allocation of assets. If there is terminal value, it's a pillaging. Cases like these, where the terminal value starts looking more theoretical than practical, are how those incentives shift.
- rswail 5y agoWhat happens in the situation where there isn't a "terminal" point for a company? Coca-Cola has no reason to "terminate" itself, so why shouldn't it distribute profit excess to its operating requirements back to shareholders?
- ttt333 5y agoThe terminal point doesn't necessarily have to apply for the company, or even the financial asset based on the company. There is an simple model in finance [1] that collapses an infinitely growing stream of cash flows into a finite present value. So to your example of coca-cola, even if you assume they will exist and distribute growing profits forever, you can still find a terminal value. [1]: https://corporatefinanceinstitute.com/resources/knowledge/valuation/gordon-growth-model/ https://corporatefinanceinstitute.com/resources/knowledge/va...