Here’s how I think it works - worth is valued by the potential amount of money the business has(n’t) instead of the actual. Like valuing your bank account by its pre-pending amount. E.g.:
Nvidia has $1T worth of assets. They also have $3T in other people’s money, in their name, held (and actually owned) by stockbrokers. This puts Nvidia’s theoretical worth at $4T, despite the actual, worth being $1T.
Now, say the US government promises to pay Nvidia $500B for goods under a contract (a kind of IOU combined with promises to respect each other, with threat of retraction if respect is not kept). The US doesn’t have that money. They’ve got an advance promise from banks so they only theoretically have the money. But this doesn’t matter. Once Nvidia agrees to the deal in which the government promises to one day pay money they don’t have, then their ‘worth’ becomes $4.5T. Inflated by the value of existing and promised investments.
An actual business finance expert can feel free to tell me how far off I am.
So Nvidia is “worth” almost twice as much as the pharmaceutical industry?
Here’s how I think it works - worth is valued by the potential amount of money the business has(n’t) instead of the actual. Like valuing your bank account by its pre-pending amount. E.g.:
Nvidia has $1T worth of assets. They also have $3T in other people’s money, in their name, held (and actually owned) by stockbrokers. This puts Nvidia’s theoretical worth at $4T, despite the actual, worth being $1T.
Now, say the US government promises to pay Nvidia $500B for goods under a contract (a kind of IOU combined with promises to respect each other, with threat of retraction if respect is not kept). The US doesn’t have that money. They’ve got an advance promise from banks so they only theoretically have the money. But this doesn’t matter. Once Nvidia agrees to the deal in which the government promises to one day pay money they don’t have, then their ‘worth’ becomes $4.5T. Inflated by the value of existing and promised investments.
An actual business finance expert can feel free to tell me how far off I am.
That’s exactly how it works.
Discounted cash flow - Wikipedia - https://en.wikipedia.org/wiki/Discounted_cash_flow