Here's a serious question: what should the valuation be for a company that is not growing, but generating $X amount of profit year after year, with no risk, forever (and assuming the profit keeps up with inflation).
Logically, companies are valued on their expected future profits. Since you want those to be as big as possible, growth in general is good. But at some point, in rare cases, a company may get so big that it has reached the point where it's just extremely profitable. Wasn't that supposed to be the end-goal?
The main variables are the annual cash flow amount and a “discount rate” which is the interest rate you would earn at equivalent risk.
Each year’s cash flow is divided by (1 + i)^n where I is the interest rate, and n is the number of years out.
For example, 10 years of future annual recurring revenue of $100mm per year, at a discount rate of 5%, has a net present value of $772mm.
That 10th year’s $100mm is only worth $61.4mm in present value based on the 5% interest rate. It is the same thing as saying: $61.4mm invested at 5% would turn into $100mm in 10 years.
If Apple’s net profit turned into a steady $50b stream from here on out, at a 5% discount rate, it comes to a NPV of $673b over the next 20 years. Their current market cap is $680b by the way.
Indeed, which breaks down the entire market rationale of capitalism right. It seems that we ought to put minimum hold times on shares. There shouldn't be any medium and certainly no short-term shareholders.