r/valueinvesting
How can we ever trust individual stocks if market narratives can completely change valuation multiples? (Adobe vs AMD)
Author questions how to trust stocks when narrative shifts cause severe multiple compression, using Adobe and Microsoft as examples.
- Market narratives and sentiment shifts can cause severe valuation multiple compression regardless of strong fundamentals.
- Even consistently growing free cash flow might not prevent a stock from trading at a permanently lower multiple if the dominant narrative changes.
Value investing theory says that over long periods, stock prices should follow fundamentals and intrinsic value. But when I actually look at how the market behaves, it feels way more unstable than that.
Take Adobe for example (Forward PE 8). The business is still profitable, still growing, still producing strong free cash flow. Nothing looks “broken” in a traditional sense. But the valuation multiple has compressed a lot compared to where it used to trade. And it seems like a big part of that is just how the market is feeling about it now — growth concerns, narrative shifts, AI fears, etc.
That makes me wonder something more uncomfortable:
What if the same thing can happen to companies everyone currently trusts?
Like Microsoft, Meta, Amazon, Visa, Apple… even if they keep executing and growing steadily, what actually stops the market from just deciding one day that they deserve a much lower multiple?
For example, what if Microsoft keeps growing FCF for 10 years, but the market at that time just says:
“Yeah but we only want to pay 5x earnings for it now because sentiment changed or something new became the dominant narrative.”
I get the argument that cash flows matter in the long run. But in the real world, it feels like multiple compression can dominate returns for long periods of time, even for good businesses.
So I’m trying to understand this better from people who’ve done this for a long time:
\- How do you actually trust that multiples won’t just collapse for basically “non-fundamental” reasons?
\- Is there a real mechanism that forces the market back to fair value over time, or can sentiment override fundamentals for decades?
\- And what would stop high-quality companies from just becoming “cheap forever” if narratives shift enough?
Not trying to argue a point here, I’m genuinely trying to understand how experienced value investors deal with this uncertainty when they buy individual stocks and hold them for the long term.
Thanks, but no thanks. I’m trimming as it goes up, recouping my initial investments but we’re still early innings on the AI buildout and to use a word you don’t like, AI “Revolution”
What do you believe a company guiding for 12-18% EPS growth should trade for?
The amount of negation in a sub that is supposed to be about smart investing is terrifying. They only see those excel numbers, use per as a rule of life. And when you offer an alternative take you are mocked.kr ignored.
You need to put the entire market on take before saying if something is transitory of permanent. All those SaaS company were being hit by ai and now they are being repriced. They aren't going away, not going out of business, but they are being heavenly repriced.
As Gemini told me, yeah guys, you can use Gemini to learn, not just to ask about what goes goes up or down, that relative to tech, every disruption change the whole market, and ai is a huge disruption.
Adobe and all the SaaS team are being repriced, and you can see at real time. Read the market not just those nicest excel sheets.
I've purchased shares for less than net cash before. You cannot trust a particular valuation floor will hold.
The only cure I have is to think like an owner. If you are not looking to sell, it doesn't really matter what the current prevailing price is.
If you can't say that about most of your positions, you're not value investing the way I think about value investing.
The market trades on emotions and not valuations.
It depends on where the money goes. If management is lighting it on fire then that'll reflect in a drop in earnings eventually as bad assets are written off.
If it's just stored as cash, for most companies the shareholders can vote to force the company to return capital to shareholders. For companies with special voting stock there's nothing much you can do.
At the end of the day, you own a share in a profitable enterprise. So there's a valuation floor in the sense that you can always opt to not sell your shares and just collect the profits from the enterprise.
I agree somewhat. Foreign countries have legal concerns. For instance if you buy a company in China you don't really own the company. You own a certificate in the Cayman islands that says you're entitled to a share of revenue equal to the share you'd get from actual ownership. What this means is that if, for any reason, China decides they no longer want foreigners to get paid you won't be able to do anything about it.
A lot of people joke that America is a third-world country now with everything going on with Trump and AI circular deals but rule of law is still very much there.
Would you invest in Russia at a PE of 5 if you're from Europe or the US ? A lot of people wouldn't because they fear their assets might get seized.
You have to consider other forms of risk besides valuation risk. Legal risk is a real thing.
Yep. This is why I don't invest in Ali Baba or tencent, even though I think they're a great deal right now
I expect Tencent to have a rough couple of years. They're very heavily invested in gaming and due to the hardware component price hikes people are not upgrading their PCs and are buying less games, in-game microtransactions and DLCs. That all hurts their revenue growth. Additionally, game developers are getting really good. A decade ago you had a handful of amazing studios that dominated the market but more and more indie games are popping off and taking players away from big games Tencent has invested in. The result is a very fragmented market and it's probably only going to get worse. The net result is great for gamers and indie developers but I think big studios will suffer, with very few exceptions like Take Two, CDPR, Larian or FromSoftware, etc.
I'm not sure if you follow Xbox news but in the last few days we found out that their net margin was 3%. Yes... 3%! You're better off putting money in short-term treasuries than owning the Xbox business. And this is a subscription-based business with billions of cash and talented studios. It just shows you how hard game development is. Platforms like Steam are the real winners. They take a cut no matter which game sells well. Like Google or Meta. They don't care if people buy your product as long as they get their ad revenue.
If only valve were publicly traded...
This does not answer his question at all.
So if your ai model pops out copyrighted material and you get sued to kingdom come is that also not a problem for you ? Because the ai companies will definitely point at you and say it’s a you problem.
I can ensure it’s a very little concern. If you don’t believe, then just look at this. Before AI.
https://www.reddit.com/r/Design/s/OeLjYtXztD
Digital design is very hard to defend in terms of copyright. You to have blatantly copy pixel for pixel, to the point where you can tell the difference, to get lawsuit on your head. It’s anything but a minefield.
At the end of the day it’s your money. If you don’t want to listen to someone from the design industry, it’s your own choice. I’m just saying Legal indemnity is not a big factor for customers as you think it is.
There’s alot that goes into that. The legal framework protects fair use and also if you’re not operating in the same industry. The explanation behind that is stacks of legal context. That’s why all these companies have lawyers on payroll. For example can you give me a shoe company other than Nike that has the Nike symbol ? Can you show me an example of that ?
Brooks and ASICS both have a swoosh-like design.
You really have to blatant to get sued.
AI won’t generate an exact Nike logo unless you specifically ask for it. But then you are also doing it deliberately. At that point, you might as well you download the svg file from their official website .