about 3 years ago • 1 min
Question from Stuart: Why are companies like electric vehicle maker Tesla and online grocer Ocado more valuable than the biggest names in the autos and UK grocery industries, even though they earn a fraction of the profit?
Answer from lead analyst Carl: Hate to disappoint, Sam, but there’s no clear answer: a company’s share price reflects the opinions of lots of investors, rather than one cohesive viewpoint. So on one hand, Tesla and Ocado’s values might reflect how optimistic plenty of investors are about their growth. A company’s theoretically worth the present value of its future cash flows, which means investors will push its share price up if they expect it to earn more money further down the line. And if, at the same time, they take a more pessimistic position on industry stalwarts and push their share prices lower, the smaller company’s valuation could overtake them. On the other hand, we could be witnessing "irrational exuberance", where investor enthusiasm pushes company valuations higher than seems sensible when you compare them to the company’s earnings potential. That could explain why Tesla, for example, is worth more than Toyota despite producing a fraction of the vehicles of each year.
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