2 ... their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. But if you don’t mind rolling up your sleeves and tweaking the numbers an intrinsic valuation system gives you, you might find some success. She makes $0 as Independent Director at NexPoint Residential Trust. By far the best predictor was the previous year’s shareholder payout, which is exactly what one might have guessed. It doesn’t take into account a lot of things—there’s no asset turnover, no consideration of debt, no return on equity or assets or capital, no free cash flow or capital expenditures, no enterprise value. Chart Of The Week: ANET completed an inverse H&S on the weekly chart last week. ‘Dean of Valuation’ Aswath Damodaran on FAANG Stocks, the Economy, and Companies Worth Buying “Over the long term, I think winners and losers will be seen more in terms of sectors rather than countries,” asserts the NYU business school professor. Its overall average is 5.84% (again cap-weighted), but its average between 1999 and 2006 is 8.50% while its average between 2012 and today is only 3.37%. Does valuation have to be so complicated? If g were constant for all periods (it’s not), a simple mathematical reduction would result in the following formula: where PV is present value, d1 is next year’s dividend, r is the discount rate, and g is the steady growth rate. My marketplace service, The Stock Evaluator, comprehensively ranks over 5,000 stocks weekly based on a sophisticated multi-factor system with deep roots in accounting and valuation methods. Here’s a chart illustrating the performance of my intrinsic value method on the S&P 500 compared to some common relative value methods. In addition, some people think R&D expenses should be capitalized, and others don’t, which will seriously affect earnings and EBITDA figures. Now in performing the above exercise, I used revenue growth and shareholder yield as my proxies for g and d in the formula. Aswath Damodaran I am a Professor of Finance at the Stern School of Business at NYU. This is certainly the way we assign values to bonds. So I would conclude that using an overall discount rate of 6% plus the risk-free rate is likely wiser than using sector-specific rates. I wrote this article myself, and it expresses my own opinions. I decided to test this. My classes are carried online and on iTunes U and were chosen as one of the top ten MOOCs in the world in 2012. © 2020 Forbes Media LLC. The conventional way to handle this is to use a two- or three-stage growth model. (I admit that this study necessarily suffers from survivorship bias. Don’t assume that D+CF = DCF ... early in their life will be worth more than assets that generate cash I’m not claiming that it’s better than what others (e.g. Suffice it to say that for infant companies like Uber (UBER) and Peloton (PTON), I’ve concluded that the kind of present-value valuation I’m advocating in this article is nearly impossible, for reasons I’ll give shortly. So let’s say the dividend paid by a company in any given year is dt and its present value is PV. In Security Analysis, Benjamin Graham and David Dodd wrote, “[The] concept of intrinsic value, as . Now obviously it would be crazy to use this calculation for every company. There are simply too many factors to take into account. Since January 1, 1999, this has averaged 3.58% (using a cap-weighted average). Here’s another chart, showing how this intrinsic value method compares to price to sales and EV to EBITDA over the last twenty years: You’ll see that at the beginning of this century, EV/EBITDA was a great way to generate excess returns, and by now it’s really not; intrinsic value’s outperformance, though small, has remained pretty good throughout this entire time. Ideally, a portion of revenue becomes free cash flow, which is then returned to the shareholder. Consider that the treasury rate has averaged 3.44% over this period, and then consider that the total market cap of these companies has increased by 9.62% per year (compounded). So our approximation of intrinsic value is a pretty holistic measure. Just as there are five components to predicting shareholder payout, I recommend looking at five margins: gross margin (gross profit to sales), operating margin (operating income to sales), net margin (net income to sales), cash flow margin (operating cash flow to sales), and shareholder margin (shareholder payout to sales). It’s therefore impossible to calculate for companies whose expected growth exceeds or comes close to the discount rate. I calculate forward shareholder yield by taking the shareholder payout as defined above and dividing it by the market cap at the beginning of the payout period. But it turned out to be an idle exercise, not worth presenting in detail. I came up with a different formula based on multiple regression and winsorizing outliers that avoids ranking. . Please note that I did not backtest my system before coming up with it to see whether it would actually make a profit. It has a strong out-of-sample record: since the service began over 2 years ago, high-ranked stocks have consistently outperformed the market while low-ranked stocks have consistently underperformed it. By looking at a company’s current margins and whether those are likely to increase or decrease over the years, and by projecting revenue growth, we can, through some relatively complicated mathematics, come up with the “dividends” needed for a two-stage analysis of an “adolescent” company. And that’s easy to say and impossible to figure.”, “There is no one easy method that could be simply mechanically applied by, say, a computer and make anybody who could punch the buttons rich. The essential thing to examine is a company’s margin and whether it is likely to increase. Most importantly, risk measures should. The founder of a startup will begin market validation by problem interview, solution interview, and building a minimum viable product (MVP), i.e. Revenue growth is the most conservative measure of growth. Let’s look at shareholder yield first. We try to figure out how much the object will be worth in a year’s time, or two years, or ten years, and discount that amount back to the present time. It’s possible that companies that didn’t survive for twenty years might have quite different growth trajectories.). The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. But we ought to be able to arrive at a range of possible prices for a stock. ... Net Income * Payout ratio = Dividends Cost of Equity Expected dividends = Expected net For others you may want to put in different numbers for sales growth. Personal returns/net worth of Aswath Damodaran? The key takeaway is that in calculating future sales growth, one needs to look at a wide variety of factors, not only past sales growth. So what? Immature companies often have little or negative shareholder payout, so there’s no dividend payment to put into the present-value equation. But wouldn’t it be better to try to figure out how the market is doing it, or what the prices that the market assigns stocks are telling us? Because EBITDA and old-fashioned cash flow are very highly correlated with (in other words, very similar to) operating income but inferior in fit, we can eliminate those, leaving us with five significant data points in predicting shareholder payout. Now let’s get into some very elementary math. I then divided this by the total market cap of all these companies at the beginning of the fiscal year I was measuring. View all Motley Fool Services ... What's the Stock Worth Now? Underpriced stocks haven’t outperformed basic benchmarks. But it’s quite necessary too. It would take about 40 hours to watch the whole semester, but it seems like a really good resource. Tesla’s current price reflects the expectation of its success ten years from now, and its price ten years from now will reflect the expectation of its success twenty years from now. That is because intrinsic value is concerned with the far distant future. For example, Tesla might have a growth rate of 40% right now, but once it theoretically dominates the earth, its growth rate might be only about 4%. Everything else—profitability, return on capital, earnings growth, free cash flow generation, asset turnover, accruals, and so on—are simply the steps between those two. When you think it through, high risk does not equal high reward. It needs only to establish either that the value is adequate—e.g., to protect a bond or to justify a stock purchase—or else that the value is considerably higher or considerably lower than the market price.”. WeWork's equity is really worth $14 billion — 70% below where it last raised money in private markets, NYU’s ‘dean of valuation’ Aswath Damodaran says. They are indispensable figures and should never be ignored. I am not receiving compensation for it. Archived. The results were even more extreme: low-beta stocks deserved a discount rate almost 2% higher than high-beta stocks. A bond pays out its cash flows in the form of interest, but many stocks pay no dividends at all. And let’s treat stocks like collectibles for a moment. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation BrandVoice, Intergalactic Finance: Why The Star Wars Franchise Is Worth Nearly $10 Billion To Disney, Pfizer-Allergan: Why Growth At Any Price Is A Dangerous Game, The Cautionary Tale Of Theranos: Beware Runaway Stories, Valeant Pharmaceuticals' Dizzying Fall From Investors' Good Graces, Bermuda Triangle Of Valuation: These 3 Issues Can Sink A Business Valuation, A Disruptive Cab Ride to Riches: The Uber Payoff. Aswath Damodaran (born 23 September 1957), is a Professor of Finance at the Stern School of Business at New York University (Kerschner Family Chair in Finance Education), where he teaches corporate finance and equity valuation.. Is … Updated: January 2020 Aswath Damodaran 1. As g gets closer to r, PV gets closer to infinity, and if g is greater than r, then one cannot place a value on the company. It takes into account price momentum, analyst estimates of next-twelve-month sales growth, asset growth, the ratio of net operating assets to total assets, the median sales growth over the last five years, and analyst recommendations. You can see it here. Then I took the median growth of those companies over each of the last nineteen years. Among her predictions: Elon Musk's car … If you don’t follow my logic, here are the equations: v = d/(r – g)where v is value, d is payout, r is discount rate, and g is growth. ... 2020, was about two weeks into the meltdown and it is indicative of how little we knew about the virus then, and what effects it would have on the economy and the market. This is called the equity risk premium, and it has an average of 5.99% overall. Then we’ll take that as a percentage of these companies’ total market cap (shareholder yield). The key point is that in calculating future shareholder yield, past shareholder yield should not be your only data point. I discuss the ins and outs of intrinsic value calculation using an evidence-based approach, and come to some unconventional conclusions while affirming some of the basics. I have written four books on valuation, three on corporate finance and three on portfolio management, though none of them contain anything profound. But we can’t simply substitute a percentage of revenue. In two previous pieces, I examined an interview given by Aswath Damodaran, a professor at New York University's Stern School of Business, in a special report by Goldman Sachs on the issue of corporate buybacks.Damodaran is very much an orthodox thinker when it comes to corporate finance, and this is especially evident in his opinion on the practice. But for a very rough approximation that can be relatively easily automated, this is what I’ve come up with. He has posted a full semester’s worth of both classes on YouTube. As I said at the outset, doing intrinsic value by an automated method, which is what I’ve done here, is almost certainly not going to make you wealthy. There are probably twenty different ways to measure free cash flow, and companies regularly report earnings and EBITDA numbers that differ significantly from those mandated by generally accepted accounting principles (GAAP). I relied primarily on FactSet data, but checked Compustat data as well.). They’ve avoided actually looking at the evidence and asking the hard questions that result. This in turn can give us some insight into what will be useful for estimating the intrinsic value of immature companies: their ability to convert revenue not only into shareholder payout but also into income and cash flow. Now what really happens is that g starts off at one number and then changes. Companies in the first stage are almost impossible to assign an intrinsic value to, but using a two-stage valuation process for the others can give you an approximation of what they might be worth. In general, high-beta stocks seem to be paying less and growing less than stocks with low betas, though there are time periods in which the opposite is the case. © 2020 Forbes Media LLC. Some companies have high revenue growth but poor prospects of actually converting that revenue into shareholder payout. At the very bottom are the companies with the largest negative value: Uber (UBER), Peloton (PTON), and Zoom Video (ZM). Annual sales growth, on the other hand, has the opposite trajectory. So the present value of future cash flows may not be the right way to value a company’s stock. Valuation is a Science and an Art. If a collectible increases by 10% in value every year, it is essentially paying a dividend of 10%. If we were to do so, then there would be no justification—besides the market’s extremely opaque estimate—for some companies to be valued at hundreds of billions of dollars while others are valued at only a couple of million. Because future prices, however, must always be discounted to arrive at present value, the value of Tesla a hundred years from now will make very little difference to today’s price, while its value two or three years from now matters a lot. The stunning rise and drastic drop in Valeant's stock price is a reminder that growth built on acquisitions almost always hits a wall. He earned his MBA and Ph.D degrees from the University of California in Los Angeles.Aswath Damodaran had a spate teaching at the University of California, Berkeley, from We could, as most do, just trust the market to do it. And then each year’s payout is discounted by 9.43%. What I want to do in this article is to look at intrinsic value from scratch, using actual evidence from today’s markets, and bring some fresh and different ideas to the process. Years 1 through 5 will have an initial growth rate, years 14 through infinity will have a final growth rate, and years 6 through 13 will have a growth rate that steadily drops from the initial to the final growth rate. All of these are clearly “infant”companies, which, as I’ve stated before, are not fit subjects for intrinsic valuation due to their enormous negative projected shareholder payouts and their history of decreasing margins. This article is timely. Aswath Damodaran www.damodaran.com Aswath Damodaran. I’ve already discussed this at length, giving a number of factors to take into account. It doesn’t jump around nearly as much as other measures. We require as inputs the projected shareholder payout, which I base on the company’s present shareholder payout, its net income, its EBIT, its cash flow, and its gross profit; its recent annual sales; its projected sales growth; its median payout margin growth over the last five years; and the standard discount rate. A young company will likely not have a shareholder payout; a mature company will. . I then took the sum of dividends paid and equity purchased of all these companies over the past year and subtracted the sum of equity issued. Implied ERP (daily) from February 14, 2020 - September 1, 2020; My annual update paper on ERP (March 2020) My annual update paper on Country Risk (July 2020) My data on ERP & CRP by country (January 2020, updated April 2020 and again in July 2020) Downloadable … I also thought that one could specify discount rates for specific sectors. But a public company is not a collectible or an artwork or a bar of gold. Performing multiple regression after trimming outliers can give us a formula, which I’ll provide at the end of this article. Therefore, despite the Modigliani-Miller theorem that capital structure is irrelevant to value, I’m going to include only dividends paid and net equity purchased. The growth/value dichotomy that so many people talk about is a false one when it comes to intrinsic value. It decreases from there to a final value of 2.18%, which is based on a formula that takes into account projected shareholder payout as well as the growth of shareholder payout over the last five years. This makes some intuitive sense. Maybe intrinsic value is a little better than the relative value methods, but only barely. I compared shareholder payout in one year to the previous year’s possible indicators of shareholder payout. As Aswath Damodaran, one of its most elegant and ... We try to figure out how much the object will be worth in a year’s time, or two years, or ten years, and discount that amount back to the present time. The fact that mature companies grow at a steady rate gives us a way to calculate the discount rate without depending on guesses as to the return of an equally risky investment. Estimating growth is of paramount importance to calculating value. The sales growth diminishes linearly from year to year down to a final value of 8.3%, which is a somewhat arbitrary number I use for high-growth companies. If you were to do this kind of valuation for a company like Uber, you’d end up with a huge negative number, since its current margin is not only negative, but is getting more negative every year. Companies do go through stages: a stage of extremely high but steady growth, a stage of declining growth, and a stage of low but steady growth. The same holds true for shareholder yield. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (The actual formula is at the end of the article.) c) present a deliberately naive perspective on intrinsic valuation which might provide present and future practitioners with a few new ideas. But when trying to calculate the discount rate, I think it’s safest to be conservative. A bond has a fixed maturity and a stock does not. I plotted this since 1999, downloaded the chart results, and took the average. What I’m saying is that we really can boil down a mature company’s intrinsic value to two basic things: shareholder payout and revenue growth. But on the whole, few investors actually practice it, despite paying lip service to it. (If you’re a Portfolio123 member and want to know how I calculated the discount rate, I created a universe of all stocks that have reported annually for fourteen years or more, have a market cap of $30 million or more, and sell at a per share price of $1 or more. Yes, risk and reward are correlated up to a certain point, but beyond that point, the higher the risk, the lower the reward. All these factors are of great value, and if you’re serious about calculating intrinsic value, you’ll take them into account somehow. Aswath Damodaran 2 Discounted Cashflow Valuation: Basis for Approach n where CF t is the cash flow in period t, and r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. This gets quite complicated. Weekly evaluation of thousands of stocks based on sound financial metrics. We throw almost all decisions into the too hard pile, and we just sift for a few decisions that we can make that are easy. To report a factual error in this article. This could be expressed by g for growth. NYU Business Professor Aswath Damodaran Just 15 months later, Uber is reportedly on the verge of raising another $1-billion venture round in which it would be valued at up to $70 billion. In calculating projected shareholder payout, we looked at equity purchased, equity issued, dividends paid, net income, operating income, operating cash flow, and gross profit. If a company generates growth or returns the cash to shareholders, that will show up in this conservative exercise. Cathie Wood Net Worth. Trump’s senior adviser and son-in-law Jared Kushner used depreciation to pay almost no income taxes between 2009 and 2016 while his estimated net worth rose fivefold, to … But when I tried this, only three sectors had implied discount rates that were more than 10% different from the average (energy, health care, and utilities, all of which were higher than average, most likely because health-care companies grow more and energy and utility companies pay large dividends). Does that mean we can compare pricing a public company to pricing a purebred horse? After taking Professor Damodaran's Advanced Valuation course in 2019, I am now enrolled in a graduate diploma course in Mining Law, Finance and Sustainability where the course argues that ESG investing will pay off for both companies and investors. Aswath Damodaran, Professor of Finance Education at NYU Leonard N. Stern School of Business, discusses his valuation call on Amazon. ... Pfizer and BioNTech expect to produce up to 50 million vaccine doses in 2020, and up to 1.3 billion doses in 2021. Catherine D Wood 's reported Net Worth at least $106,000 as of September 21, 2020. To this I added the total sales of all these companies divided by the total sales last year of all these companies and subtracted one to get the aggregate sales growth. We also feature a newsletter article on Costco (COST) business model and the latest Aswath Damodaran YouTube video. View my complete profile The four pillars of intrinsic value analysis are shareholder payout, revenue growth, payout margin (and its growth), and the discount rate. If we use 9.43% as our discount rate, a mature company with 0% expected revenue growth will be worth about 11 times its expected shareholder payout while a mature company with 8% expected revenue growth will be worth about 70 times its expected shareholder payout. This is what you can expect as a company grows from year one to year nineteen: As you can see, a typical company will start with a sales growth of around 19% per year, hold steady at that rate for about five years, then slowly fall to around 6% after fifteen years or so, after which growth will be relatively steady again. Let’s say they both pay about $300 million to shareholders and have a growth rate of about 4%, and both are mature companies. I teach classes in corporate finance and valuation, primarily to MBAs, but generally to anyone who will listen. . Various people have tried to automate the process—most notably Simply Wall St. To their credit they have made their calculation procedure public. So the discounting of future value to arrive at present value, and using infinity as an endpoint, makes a good deal of sense. As a long-time Apple user and investor, I must confess that I was bothered by the way in which the film played fast and loose with the facts, but I also understand that this is a [...]. The way to take care of this conundrum is to define the net increase in a collectible’s value as its dividend. Of the largest companies in the US by market cap, the ones that don’t make the list are also interesting. If you want to judge a company holistically in an automated (quantitative) fashion, I suggest using multifactor ranking systems instead. definite and ascertainable, cannot be safely accepted as a general premise of security analysis. Then. For the terminal value, I took the eleventh year’s payout and divided by (9.43% – 8.3%) before applying the discount rate. Three structural problems prevent the forming of good valuations and will continue to be a barrier until they are addressed in the industry. If you buy Tesla’s stock today, it doesn’t matter if you plan to sell it in five months or in fifty years. This formula, like all the formulas in this article, will give you a very rough estimate, and should not be used widely, especially when trying to establish an intrinsic value for a particular company. Does this really make sense? Close. But practitioners have largely avoided questioning these most basic assumptions and procedures. As Buffett said in 1998, intrinsic value is, “the present value of the stream of cash that’s going to be generated by any financial asset between now and doomsday. So I’d like to propose five things that separate young from mature companies. I’ll warn you in advance, however. Often, when the company is very mature, g becomes a rather low number. a) show that intrinsic valuation has some basis in real life and is not just an idle practice for finance nerds; b) try out an evidence-based method which, I hope, can provide some insights into how the market works; and. It’s hard to draw conclusions from numbers like these. Some people think that the discount rate should reflect the risk being taken. . But stocks and bonds are fundamentally different types of investments. A bond is tied to the company’s current performance and a stock is tied to its future performance. Berkshire Hathaway (BRK.B), which is the fifth largest, comes out 12th; Tesla (TSLA) comes out 17th, ahead of other US car companies, but behind Volkswagen (OTCPK:VWAGY) and Toyota (TM); Visa (V) comes out 58th because it’s really overvalued; Walmart (WMT) comes out 11th; and Johnson and Johnson (JNJ) comes out 20th. Before we get into multi-stage analysis, let’s contrast young and mature companies. So I would conclude that NVR is fairly priced or slightly underpriced. Sticking to revenue and shareholder payout brushes all that aside. What if we use free cash flow or net income for d? The fact that it works on S&P 500 stocks is a nice bonus, but I wouldn’t bet a dime that this particular automated system will continue to work. Surprisingly, however, free cash flow was an extremely poor predictor of shareholder payout. Investing in a tech stock is riskier than investing in a utility, so the discount rate should be higher. I have no business relationship with any company whose stock is mentioned in this article. No, pricing a public company is unlike pricing anything else. Accordingly, I think it’s best to consider any company whose intrinsic value is between one-half and twice its market cap to be fairly priced. When I added up all the present values of the future dividends, I obtained an intrinsic value of $22 billion. Its projected shareholder payout is $453 million. But all of these companies require a far closer look than I’ve given them before determining whether they’re truly undervalued. In a very long and detailed article, I tackle questions such as whether the discount rate should vary with a company's beta and how to conceive of shareholder payout. This is called the Gordon Growth Model. Instead, it’s a nice basis for doing some wider data analysis. These results were obtained by looking at the performance of all stocks with an intrinsic value greater than twice the company’s market cap (an average of about 25 to 30 stocks out of the 500) if one bought those stocks every week and held them for a year. I am a professor at the Stern School of Business at New York University, where I teach corporate finance and valuation to MBAs, executives and practitioners. If there’s one thing that most intrinsic value procedures have in common, it’s that they’re not evidence-based. Now we can add shareholder yield to these companies’ total sales growth and thus find out what the discount rate will be. April29, 2020 Aswath Damodaran Aswath Damodaran 1. For mature companies, however, a very rough present-value calculation can be relatively simple. I have an active presence online, on Twitter (@AswathDamodaran) and with my website (http://www.damodaran.com). We know that the present value of an investment that pays dividends in perpetuity with a constant growth rate equals its dividend divided by the difference between the discount rate and the growth rate. In 2020, YouTube could be worth US$170bn achieving a +100x return.

aswath damodaran net worth 2020

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