alt Hacker NewsThe problem is that stocks are often valued and traded on revenue growth, not profit[0] So circular funding generates stock price bumps when, as you said, there's no inherent value underneath. Creates a recipe for a crash.
[0] consider pagerduty, incredibly profitable with little revenue growth. Trading at 1.5X revenue, where high revenue growth, unprofitable companies are trading at 10X revenue.
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mewpmewp2 • last Monday at 8:03 PM
Both are taken into account. Potential profitability is taken into account with growth companies. Circular funding has no effect on that. With unprofitable companies case is made on how risky the company is and what the potential profit will be in the future.
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I feel like it's almost more of a Popular stock thing. Consider if pagerduty eked out an empty deal with any one of the "Pop stocks" that had little impact on their real profitability. Would stock trade differently or better? It feels like it really would in the modern market. Like even if the numbers weren't a big change, the buzz would be.