CMV: Extreme valuations are not always irrational. Sometimes they just mean the buyer is accepting a terrible return.

People often look at companies like SpaceX, OpenAI, Nvidia, Tesla, etc. and say something like: “This valuation makes no sense. The market has gone insane.”

I’m not sure that’s actually the right conclusion.

A valuation can look absurd without the math being absurd. It may simply mean that the buyer is using, whether explicitly or not, a very low discount rate.

Take the basic perpetuity formula:

**Value = Cash Flow / Discount Rate**

Or:

**PV = CF / r**

Now take a silly example.

Suppose an asset will eventually generate $0.01 of free cash flow every year forever.

At a 10% discount rate:

**$0.01 / 0.10 = $0.10**

At a 1% discount rate:

**$0.01 / 0.01 = $1.00**

At a 0.1% discount rate:

**$0.01 / 0.001 = $10.00**

At a 0.01% discount rate:

**$0.01 / 0.0001 = $100.00**

And so on.

Push the required return low enough, and even a tiny perpetual cash flow can justify a huge valuation.

So when people say, “There is no way this company is worth X,” I think the hidden question is:

**Worth X to whom, and at what required return?**

If the marginal buyer is willing to accept a 2%, 1%, or almost zero expected return because they want access, scarcity, optionality, status, indexing exposure, or simply exposure to a one-of-one asset, then the valuation can look insane while still being internally consistent.

That does not mean it is a good investment. It may actually mean the forward return is awful.

But “awful forward return” is not the same thing as “irrational valuation.”

And I think this also applies to value investing.

A lot of value investors talk as if this problem only exists in growth investing. I don’t think that’s true.

If your DCF depends heavily on:

* a very low discount rate,
* a huge terminal value,
* a moat lasting longer than expected,
* normalized margins that may never come back,
* or a business surviving indefinitely,

then you are also making a big claim about the future. It just looks more respectable because it’s inside a spreadsheet.

So maybe the real divide is not value vs. growth.

Maybe the real divide is:

**What return are you actually underwriting?**

My view is that many “crazy” valuations are not necessarily proof that the market has lost its mind. They may just be proof that the marginal buyer is willing to accept a much lower future return than the critics are willing to accept.

CMV.