In early August, SpaceX shares sank noticeably, investors were frightened by the growth in AI spending. It would seem an ordinary market event. Nevertheless, behind it is a question that most market participants prefer not to ask out loud: what exactly do they buy when they take company securities without a long history of financial results?
Two games with different bones
Imagine: you play dice. In the first version – an ordinary cube, six faces, the probability of each is exactly known. In the second – you do not know the number of faces, nor their ratio, nor what numbers are written on them at all. In the first case, you are dealing with risk, in the second – with uncertainty. The difference is fundamental: the risk can be calculated and the probability of the outcome can be estimated, and where this cannot be done, it is no more difficult to convince anyone that, for example, a thousand will fall, than any other number.
In the world of investment, this difference determines a lot. There are always two components in the value of any company:
- The first relies on measurable data: statistics, cash flows, real results. It’s an area of risk and knowledge.
- The second relies on expectations – hopes, scenarios, stories about the future. This is an area of uncertainty and faith.
Why traditional methods stall
Classic assessment tools – DCF, benchmarking, cost approach – are designed to work with the first component. They assume that you know the future cash flows quite accurately, you can correctly discount them and find companies that are similar enough for comparison.
With young tech companies without a long history of profits and a time-tested business model, the situation is even more acute. There is almost no measurable data, but there are a lot of expectations. The grander the story about the future, the higher the score.
That is why SpaceX is worth hundreds of billions of dollars, not because current financial performance explains this figure. Because the expectations around it are greater than any current indicators. AI companies are trading at prices that do not follow from their current income, their assessment is based on expectations, not numbers.
SpaceX and Bitcoin: unobvious similarities
Bitcoin is the ultimate case. It cannot generate cash flow in principle, so almost one hundred percent its price is formed by expectations and speculation. Does it have any real value? Yes, it makes it possible to transfer money, bypassing currency control, sanctions, and banking restrictions. A specific benefit that is definitely not zero. However, it doesn’t explain any of the peaks in the decline or rise in its value – it just gets lost in the speculative noise.
SpaceX is not Bitcoin. The company has real revenue, technological advances, real business. Nevertheless, the share of measurable, fundamental value in the current estimate is relatively small, the bulk of the price is a bet on a future scenario that so far exists only as an opportunity. Here begins a zone of pure uncertainty: no one knows how many faces this cube has. Essentially, in both cases, the market is largely selling expectations about the future rather than already proven value.
What exactly an investor buys
When current financials don’t explain the price, the investor buys one of the two or both at once.
The first is the likelihood of a future scenario. That SpaceX will indeed make the kind of technological breakthrough its founders are talking about. That a particular AI company will really change the economy as it promises. That bitcoin will gain a foothold as a key way to transfer money bypassing banks and state control and because of this will only rise in price.
The second is the hope for the next buyer, that is, the bet is not that the company will create such and such value, but that in a year someone else will want to pay more for it. Classical speculative logic, which in itself is not bad, but requires honest awareness. A productive asset creates value by itself, a speculative asset costs exactly as much as the next buyer is willing to pay for it.
One popular argument for high valuations of tech companies is an analogy to those hightechs who have been successful in previous periods of technological change. The argument is attractive, but creates false accuracy: it is extremely difficult to find a truly similar asset, and for a young technology company it is almost impossible. When you compare an organization that puts on a technological breakthrough in a fundamentally new area with any known successful example, this is no longer a comparison of similar assets, but a comparison of measurable with immeasurable. Not to mention survivor’s mistake: we remember the winners and forget the many losers.
How to think about these assets
Any asset should be valued primarily at its fundamental value, and not at the current price. The price can change a lot under the influence of rumors, fears, hopes and other market factors. The fundamental cost is much more stable. At least theoretically, it can be calculated regardless of market sentiment and personal investor expectations. According to the Probabilistic-Temporal Theory of Value (PTTV), the fundamental value of any asset is determined by two parameters: the time it can create or save, and the likelihood that this will actually happen: V = T × P.
It is time, not money, that is fundamentally important here. Money constantly changes its ability to turn into goods, services and other values, while time has an invariable value: an hour today is equal to an hour in a hundred years and an hour a thousand years ago.
At the same time, the price is associated with the fundamental value and generally serves as its indicator, although it can either approach it or deviate significantly from it. The more valuable the asset, the higher the potential demand for it and, as a result, its price. And vice versa.
In simplified form, the cost can be represented as the expected net present value multiplied by the probability of its realization: V ≈ C = M × P, where M is the expected net present value and P is the probability of its realization.
With regard to SpaceX, AI companies and crypto assets, this means two honest questions – not optimistic, but realistic:
- When and under what circumstances is an asset able to justify its value with a high degree of certainty (what is the real achievable T, or expressed in monetary units – what is the real achievable level of income M)?
- What is the probability of such a scenario (what is the real P)?
SpaceX, at an estimate of hundreds of billions, assumes the implementation of a scenario, the probability of which is still low. For AI companies, the question is even more acute: the promises are huge, but when and how they will turn into real results is still unknown. At the same time, the question of how to scale their monetization remains open for many companies.
The main thing
A high market price is not equal to a high fundamental value – these are different things, and confusing them is a sure way to lose investment. Bitcoin, AI startups, SpaceX can bring huge profits, but will it be enough to justify current prices, and how likely is it that this scenario is being implemented? There is another important question. There is little doubt that new technologies will remain and will be beneficial. However, this does not mean that the current market leaders will benefit the most from their distribution. As one wise investor once said: in an era when many new car companies drove horses off the roads, the best investment was not a bet on new companies, since it was very difficult to guess the winner, but a bet against horse-drawn companies that would lose for sure.
Choose between evaluation and expectations. The higher the expectations – the higher the price, the higher the price – the more violent the fantasy, and so on in a circle, exactly until the expectations meet reality. Bitcoin has already passed this cycle several times, and each time the market managed to be surprised.
The world of investment today is a market where measurable risk and immeasurable uncertainty are mixed so tightly that they are difficult to distinguish by eye. That is why working with the assets of the “new economy” does not require new valuation models in the first place, but an honest answer to a simple question: what exactly am I buying?
If you understand that you are not taking a calculated business, but a beautiful story, act consciously, since the risk of making a mistake is extremely high. If you’re sure you know a future that nobody knows – you’re not an investor, you’re a player. This is your legal right, but you should no longer confuse one with the other.
By Evgeny Sedinkin, financier, economist, creator of the Probabilistic-Time Theory of Value