Price vs. Valuation

The share price is arbitrary. The valuation is not.

Humans are very bad at contextualizing extremely large numbers. For example:

• 1 million seconds is roughly 11 days,

• 1 billion seconds is nearly 32 years

• 1 trillion seconds is over 31,700 years.

2 trillion seems like a small step up from 1 trillion, but now you are out to 63,400 years.

It is kind of like the paper folding example from a few weeks ago. 42 folds are enough to get you to the moon, which means 43 folds are enough to get you to the moon and back. The math is simple, but that doesn’t make it intuitive.

Ben Cohen, with the Wall Street Journal, offers some cool visualizations to make this point in his article, You Have No Idea What a Trillion Dollars Is—and We Have Proof

I bring this up because SpaceX has a current share price around $200 (a relatively small number), which represents a valuation of $2.5 trillion, on $30 billion in revenue. These are two huge numbers, and our brains can’t make sense of them.

But shrink them by a factor of 10,000, and this is equivalent to valuing an unprofitable small business with $3 million of revenue at $250 million.

“But it’s only $200 / share!”

At $200 a share, a purchase of SpaceX feels like a reasonable bet on an impressive company run by an impressive leader. But the share price is just a way of dividing up the valuation. It doesn’t tell you whether the valuation makes sense. Billions become rounding errors. $200 feels like nothing. And somewhere in the gap between what feels true and what is true lies a whole lot of risk.

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Fun Fact:

At SpaceX’s current valuation, Elon Musk has a net worth of over a trillion dollars. This means that your net worth is much closer to Jeff Bezos’ (approx. $250 billion) than Jeff Bezos’ net worth is to Elon Musk’s.

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Personal Note:

Last weekend we took a trip to Small Hope Bay Lodge on Andros Island. We did some bone fishing, reef fishing, and handlining. We learned to scuba dive, jumped into some blue holes, and had an amazing time.

On the way back, we stopped in Nassau, which gave me the opportunity to put the family in matching outfits.

This afternoon, we’ll drive up to Dallas for our last lacrosse tournament of the summer.