[azylman]

This is a common misconception I see on HN.

To evaluate ad spend, you don't look at just short-term return. There's a reason that "lifetime value" is a critical concept for companies. It's fairly normal in large companies that, in a given year, you may spend more on ads than you gain from those ads - but you expect the customers you gain from them to continue spending over many years.

So you may spend $100 to gain a customer who spends $20 in the first year... then $40 in the second... then $80 in the third... now all of a sudden your return on that was positive, three years later.

These are the kind of ads you want to buy, even if in the short term it looks bad. These large marketing expenses should have compounding benefits over many years. The people who care about the short term like that are not the investors you want and not the people you're trying to please.

[H8crilA]

Okay, so how would you model that? Can you be precise? What's the lifetime revenue generated by $1 of ad spend? This number is critical, because if that number is too low then the equity is, mathematically, worthless. It's not about patience, it's about whether you're compounding a number that's >1 or a number that's <1. I just cannot tell.

[azylman]

Yes, companies have ways to do this with a decent amount of precision and accuracy based on existing user behaviors. They can often even be detailed enough to know that LTV differs depending on the channel that the customer was acquired by (e.g. organic vs. Facebook ads vs. search ads) and tailor their ad spend accordingly.

I don't know what AirBnB's numbers are, companies aren't required to disclose this and they guard it very closely :)

[H8crilA]

Yeah but as an investor why would you buy this stock, and at which price level if so? My point of view is that of an investor - how would I know if they're compounding up or down. Is it a zero? Is it great? All you're saying is "trust the management".

I am not saying they're doing a bad job, I am merely saying that it looks difficult to tell. Remember, the management has a huge incentive to sell you the stock regardless of the future value of the business, it's your job to figure out if it is a good idea.

[azylman]

I'm not saying "trust the management", I'm telling you how an investor would think about it. High spend on marketing can absolutely be justified. Additionally, there's rarely enough public info to allow any investor to independently verify whether it's justified in a specific scenario or not. But if an investor thought that there was positive ROI on that spend, they're not going to fret too much about how large that amount is - as long as it's bringing in a positive return.

[H8crilA]

Sorry for ad hominem, but it simply seems that you haven't thought about how to value (determine the price of) securities.