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If future growth is priced in, why have companies like Amazon, Microsoft, Apple and Google continue to give amazing results for the past 10 years?

Personal Finance & Money Asked on March 18, 2021

Same thing with Tesla. I was going to buy shares before the pandemic, stating that they’ve been able to double in size every 4-5 years (in terms of factories built). However I was discouraged because people said that because this information is already known by market participants, that the growth is already priced into the stock. Making the price of each share potentially overvalued. Yet the price of each share has nearly tripled in value since then.

Also similar with sector ETFs. For example I’ve read that the cloud computing market will grow to 2 trillion by 2030 and was curious if it would be a good idea to buy cloud ETFs. Yet I still get the same response, that everything is already priced in. Yet Cloud ETFs like SKYY have still maintained a 20% CAGR for the past 10 years.

People like to list the efficient market hypothesis for why the price of a stock is never undervalued… But looking at the past 10 years of these stocks I just listed seems to prove that this isn’t the case?

3 Answers

If you believe in market efficiency, future growth is indeed priced in. With risky growth comes higher potential returns. In theory, this explains why there are outperformers even when the future is priced-in. The potential outperformance is sort of like a reward for taking increased risk. When you buy a "risky stock", you sign up for two main possibilities (relative to the market):

  1. Outperformance — Great! This is compensation for enduring the higher risk of the stock.
  2. Underperformance — Too bad! This is what you signed up for when you bought a high risk stock!

People like to list the efficient market hypothesis for why the price of a stock is never undervalued... But looking at the past 10 years of these stocks I just listed seems to prove that this isn't the case?

From my understanding, this is not what the efficient market hypothesis (EMH) claims. EMH does NOT say that market efficiency = all future returns are zero (or equal to each other). Instead, EMH says that it is possible to outperform, but the outperformance is attributed to the increased risk taken. So high risk = high reward, low risk = low reward. It is in this sense that the market is efficient. EMH says that there is no free lunch in the sense that you cannot get low risk with high reward.

Answered by Flux on March 18, 2021

My take, very much as a layman in stock analysis, is that EMH prices-in the expected (or predicted) future growth.

No one can know what the future will bring. Instead, based partly on past-performance (among many other factors such as how the company is run, potential markets for their goods/services etc.), people can make a range of predictions for future growth (or decline). To each of these outcomes, they can assign a (somewhat subjective) probability. From these you can calculate an overall expected growth. It is this expectation that is factored into share prices: higher expectations will result in a higher share price.

From a comment, you say:

But can we really say that companies like Amazon, Microsoft, Google and Apple were risky investments?

Yes, of course they were risky investments (and still are, though the level of risk is greatly reduced). Go back to the Dot-com boom/bubble of the late 1990s and early 2000s. Amazon was just one player in the emerging online shopping market and Google "just" another search engine: they survived; many similar companies didn't. Microsoft and Apple were not "of" the dot-com era in the same way, but in 1997 Apple was only weeks away from bankruptcy1 when they bought NeXT, Steve Jobs returned, and Microsoft provided a $150 million injection.

Yet on average they’ve quadrupled in value for the past 5 years. And even more than that for the past 10 years.

If a company turns expected/predicted growth into actual growth, and does so over a number of years, then – other things being equal (which they rarely are) – it becomes more likely that they will continue to achieve a given level of growth. This in turn will push up the overall expected growth, and the share-price.


1 See 1997–2007: Return to profitability and the last sentence of the preceding section.

Answered by TripeHound on March 18, 2021

Concepts like

"future growth is priced in..."

are just phrases, collections of words, which Economists, and similar, use when making TV appearances / writing articles, and so on, so that they can have paying careers.

Nobody has a clue, about anything, at all, about markets.

The sense of your question is basically:

"Is all this stuff about pricing models nonsensical bumpf?"

The simple answer is

"Yes, it's hot air. Nobody has a clue."

You mention

"the efficient market hypothesis..."

Physicists and Mathematicians and Structural Engineers have things like "hypothesis".

People who babble about markets, use words like "hypothesis" because it makes one sound really Important.

A question "according to the 'EMH' X should happen but Y happened" is like an arcana question about the details of astrology.

Apple is, simply, the ultimate example from all of history of the biggest Utter Dog Stock Of All Time. It was completely flat for 20+ years. When it should have obviously been soaring. And then in contrast, lately it's had a period of price movement upwards spectacularly beyond any rational basis. Maybe it will now have another 20 years where it's dead flat.

Talk about markets from Economists, Market "Scientists", phrases with "hypothesis" and other pseudo-scientific terms added, is valueless.

Answered by Fattie on March 18, 2021

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