You don’t get the nickname the “dean of valuation” by not having well-researched and considered opinions.
This professor of finance believes that traditional valuation metrics don’t always apply to disruptive, fast-growing technology companies.
Instead, he often looks at four other factors. Here are his views on four large technology companies and how to assess their future growth.
It feels like almost every new company, particularly in the technology space, that is coming to market is loss making.
“Most of the old-time metrics we use, price-to-earnings, price to book, EV to EBITDA, were designed for mature companies,” says Aswath Damodaran, the professor of finance at New York University’s Stern school of Business who’s known as the “dean of valuation” after writing The Little Book of Valuation.
“To go into the mind-set that’s what the future looks like, already you have three strikes against these stocks,” he says in an interview with Mark Mahaney, head of internet research at Evercore ISI.
Instead, he thinks investors need to look at revenue growth, and total addressable market; what margins they expect at a steady state; and the level of reinvestment needed for growth.
For Airbnb, a company he likes, their steady-state margins should be “sky high” because it’s an intermediary model and it costs almost nothing to connect renters to homeowners.
Reinvestment, in Airbnb’s case, is acquisitions.
“Tech companies might not have land, building, equipment and machinery, but they spend like drunk sailors on acquisitions and technology,” he says.
Damodaran concedes he will be “horribly wrong” on every company he values, but this is where the law of large numbers works in his favour.
“All I need is to match the market and make a little bit more. People who go out looking for 10 baggers off the top are asking to be scammed.”
Here are Damodaran’s views on selected companies:
Amazon, he says, benefited from the bursting of the tech bubble that wiped out competitors between 2001 and 2006, and made traditional retailers gun-shy about online retail.
Their long-term focus also is relentless, asking what other company would have introduced Amazon Prime, which did nothing for seven years. “I’m sure every other company would have shut it down. Amazon didn’t.”
He says competitors can’t hope to out-wait Amazon, but instead have to offer a differentiated service, like Costco does.
Salesforce.com, he says, is a “wannabe Amazon that will never be Amazon,” because it doesn’t have the consistency of story, or management, that Amazon does.
Until Jeff Bezos bought the Washington Post, he was relatively unknown.
“If you want to build a truly great company, don’t make it about yourself. Hopefully Elon Musk will get that message at some point,” says Damodaran.
“If you want Tesla to outlast you, don’t make everything a drama about yourself.”
He’s learned from Uber Technologies that a market can be bigger than the rivals a company is hoping to disrupt, since now people are using ride-sharing services more than they were taxis.
With Airbnb, Damodaran gave them a total addressable market 2.5 times the size of the existing hotel market.
Netflix, he says, is the biggest spender on content on the face of the Earth.
“Whether you’re an optimistic or pessimist on Netflix depends on what you think about content costs.
If you think that growth in content costs is going to slow down dramatically, Netflix very quickly becomes a very attractive company.
“If you think they’re going to have trouble slowing those content costs down, it’s going to create problems,” he says.
The market where Netflix has the biggest potential for growth is India, where subscribers are worth one-fifth to one-tenth what a U.S. subscriber is.
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