How to understand project valuation?

At the end of the article on April 3rd, a reader left a long comment:

"If the value of 'company/project' in the future is assessed based on its cash flow, DeFi was overly leveraged in expectations last round," "Apart from some DeFi projects that can make money, chain game NFTs almost have no earning potential," "Even if we give it a valuation, it would probably be much higher than that of Nasdaq tech stocks like Nvidia and Tesla."

This comment touches on many very valuable issues. I will try to share my views on these questions one by one.

First of all, we must pay attention, and I want to emphasize again that:

The intrinsic value of a company is the discounted future cash flow of the company.

How long is this future?

It refers to the company's future survival period.

Since it is the future survival period, then the judgment of how long this company can survive in the future is quite insightful. It is purely a matter of personal opinion. It cannot be analyzed quantitatively, but only qualitatively. This qualitative analysis particularly tests an investor's understanding of the company.

For a good company/project, those who do not understand it may think its future potential is limited, thus concluding that its value is very low, or because of market fluctuations, they sell its stock/token early.

For a bad company/project, those who do not understand it may think its future potential is limitless, thus concluding that its value is very high, holding onto its stock/token tightly, even if its stock price/token price goes to zero, still fantasizing about its comeback.

This is why Buffett and Duan Yongping emphasize so much on "moat," "differentiation," "corporate culture," and "future cash flow." Ultimately, all of these are to judge how long this company can survive in the future and how much cash flow it can generate during that time.

If a company has a strong corporate culture, a strong moat, and essential differentiation, insightful investors can tolerate a relatively long future— I believe you won't make money for the next four years; but by the fifth or sixth year, you will start making money; by the tenth year, you might even earn what other companies take 20 years to achieve.

A typical case in the U.S. stock market is Amazon.

Amazon did not make money for a considerable time after going public; not only did it not make money, but it also continued to incur losses.

However, Bezos insisted day after day, year after year, that investors must believe: Amazon must persist because it will soon become the leader in e-commerce and the industry monopolist. At that turning point, it will bring substantial returns.

Just talking is not enough; he also demonstrated to investors the progress Amazon was making, despite the process being very challenging.

Amazon went public in 1997 and did not achieve its first quarterly profit until 2015, 19 years later. It officially bid farewell to 20 years of losses in 2016 and has since become one of the seven giants in the U.S. stock market.

The maintenance and rise of stock prices are definitely not supported solely by beautiful stories and grand narratives; they must have real performance improvements and progress. Even if it is not achieved all at once, there must be real growth.

Bezos fulfilled his promise, and Amazon's investors finally saw the light after enduring the clouds.

But this process took a full 20 years of construction and exploration. This is a test for entrepreneurs and investors alike.

At the same time, many more such companies end in failure and delisting.

So how investors choose in this situation tests their understanding of the company.

Returning to the DeFi and chain game projects mentioned in the above comment.

I can tolerate its current overvaluation, and I can tolerate its meager profits today, but this tolerance requires seeing progress and results. Even if it continues to incur losses in the next few years, are you still adhering to your original intention, still building continuously, still exploring business models?

You can't just say the valuation is high, profits are nonexistent, and in this situation, you are not making progress, not insisting on improving technology, not continuing to strive towards past goals, not developing a feasible business model, and then still talk to me about the grand narrative of the project, saying that value analysis does not apply to crypto projects?

In addition, another equally concerning issue is: to please the "market" in the short term, to please speculators, recklessly driving up stock/token prices, sacrificing long-term interests, forgetting the original intention, and deviating from the direction.

As for the NFTs mentioned in the comment, it depends on the specific positioning of the project.

For example, for a project like CryptoPunks, its positioning is very clear: it is a digital-age on-chain collectible, it does not need to develop or change, and I do not care whether it can generate cash flow.

But for Bored Apes, it positions itself as a collectible, and I believe the vast majority of investors will not buy into that, because most investors hope it is a growth-oriented project. Since it is a growth-oriented project, it must ultimately talk about cash flow and profitability.

The examples I provided above convey a simple point:

Short-term bubbles, inflated valuations, and even losses are understandable and tolerable. Even for projects I consider good, I can endure a relatively long waiting period.

But this waiting must ultimately show progress and sincerity, and progress and sincerity fundamentally translate into creating a strong moat, a feasible business model, and bringing substantial profits and cash flow—if we don't talk about these, we are merely discussing speculation and gambling.

This is common sense.