I really like the analysis. A question: Why have you assumed reinvestment of about 6 billion yearly, when historical capex seems to be about 12 billions?
Wonderful, Professor! I'm looking forward to what kind of Short you'll be interested in purchasing and more interestingly, how you Value the Short itself.
What formula do you use to calculate free cash flow? I usually just use cash flow minus capital expenditures, but I’m not sure how accurate that formula is.
He's got a great book called "Investment Valuation: tools and techniques for determining the value of any asset," I'd highly recommend making the investment in the book and devoting a good chunk of time to reading it and re-reading it and then reading it again. If you're really interested in investing it's a must read in my opinion. I've been through it once, which took a while, and I'm about to go through it again because it's a very challenging read if you're new to the game. Accounting principals are very helpful when reading through it so I'd recommend learning the financial statements like the back of your hand and study up on accounting. He's got a section at the beginning of the book which is called, "understanding financial statements" which is very useful. You're going to have to take some time when you're reading it to look up definitions and concepts because it's definitely not a "beginners" book. Accounting is the language of business, which I stubbornly found out the hard way, so get as much of that under your belt as possible because it will only help. In the book the answers to most of your questions will be answered and definitely the one you asked. Investing is not all about formulas but they are useful. I don't believe their as good as a well thought out story though (mainly because I suck at mental math which is a symptom of not paying attention in high school). Once again, don't buy the book if you're not willing to do the work, but if you're extremely interested in investing then it's one of the smartest investments you could make. If you're not that interested in investing or business, I'd put my money into an index fund consistently over a long period of time if you're looking for an investment. Do with that information what you want, if you have any questions feel free to ask (I'm a newbie), and the books available on Amazon. Best of luck.
For FCFE(Free cash flow to equity), the formula is FCFE= Net income - (Capital Expenditures - depreciation)-Change in Non-cash Working Capital + Net borrowings. For FCFF(Free Cash flow to firm), The formula is FCFF = Operating Income(1-tax rate) - (Capital Expenditures - depreciation) - Change in Non-cash Working Capital. Note- It is important to Adjust the earnings by expensing R&D and Capitalising Leases. I would suggest you to read his famous Book 'Damoaran on Valuation' for more depth.
Excellent post. I’d say the same thing I always say in my responses. Current and past numbers in companies like Apple, Amazon and others like Tesla, Netflix, Google etc are from current products and services. Part of a holistic valuation study perhaps should account for future cash flows not just from current products and services but also from future products and services. Now here’s the rub. Who knows what new businesses and markets companies like Amazon will enter, therefore how to account for future cash flows from future products and services in the valuation model? Well, that’s why I think the valuation model must account for a DCF plus ‘X’ model rather than than just the DCF. The question is to ask then would be the value of X? That is the real options value coming from the optionality of these companies entering new markets and new business lines. Needless to say, Appropriate values for WACC have to be used for discounting cashflows for ‘X’. My 2cents..
Thanks Prof. I have seen many of your books in my schools' library in Australia. I'm young, but if I want to have any inklings of your analysis, which book of yours would you recommend and how should I got about reading them? (Cover to cover, or certain chapters first and then reference with other books?). I have studied a little regarding value investing, but I am still learning and I would like to learn as much as possible (especially regarding critical thinking, you make stocks seem so fun, the analysis seems to be very fulfilling). Your help will be much appreciated.
Great Analysis....there is not much room for both companies to grow however like you put it, amazon may be disrupting more businesses out there. The one I cannot wait to see is pharmacy industry. Looking forward to hearing more on how you short Amazon or Apple.
On Amazon specifically, think this is spot on from a value perspective. Think the majority of investment in amazon comes more from a growth line of thinking. Which at the end of the day is just a different take on value. But in mind the growth thesis goes as follows. The market cap is around 1 trillion. So in order for this to be compelling how is it going to get to 2 trillion? And how likely are the things that underlay that thesis. In short, think it can hit 2 trillion on the following things. Retail hitting 500 billion. Not far fetched, WMT does this now, and Amzn potential should be bigger. Given the categories, and international nature of the business. AWS 100 billion of revenue. Again not crazy considering IBM did 90 billion a few years ago. Another 100 billion from ads, device sales, prime membership, and other new businesses. If it hits these in 8 years, it is by definition still growing, so a premium valuation gets assigned. Let's say 3 times revenue. That is a 2 billion company. Are there a lot of risks, sure. And think there is a solid case not to be long. But think there is also a solid case not to be short.
Regarding Amazon, it has been doing a good job growing. But not all markets will work long-term. They came first with cloud, but Google is catching up, is much cheaper, and coming with better Docker/Kubernetes solutions. Microsoft does a good job building solutions that support migration from AWS. I don't see much more Amazon is growing fast at right now, so while it may attempt to distrupt, it may not work, and the current bets may become tomorrow's losses, esp. once the debt becomes more expensive. My modelation gave me $750 - 850.
"Smartphone company". I see companies all around the world forcing people to work on overpriced Mac computers. Even if someone wants a more performant computer for less money, they get Apple stuff, to keep the IT ops simpler. That locks companies with Apple, to a point. Not as much as with AWS though. Other part is that Apple is a big fashion amongst teenagers. That can be volatile, but if that sticks for few years, again, these will be buying laptops and all it needs because it's actually a crippled computer: better keyboard, bigger touchpad, adapters, docking stations with hdmi and audio jacks, better speakers, etc. Or - all kind of wireless stuff which apple will make sure won't work with non-apple hw (just try to charge your phone with Apple USB 3 charger - won't work because of 0.1 V higher voltage). This is not a rant against Apple, just another PoV on whether Apple's growth will flatten.
I really like the analysis. A question: Why have you assumed reinvestment of about 6 billion yearly, when historical capex seems to be about 12 billions?
Wonderful, Professor! I'm looking forward to what kind of Short you'll be interested in purchasing and more interestingly, how you Value the Short itself.
What formula do you use to calculate free cash flow? I usually just use cash flow minus capital expenditures, but I’m not sure how accurate that formula is.
He's got a great book called "Investment Valuation: tools and techniques for determining the value of any asset," I'd highly recommend making the investment in the book and devoting a good chunk of time to reading it and re-reading it and then reading it again. If you're really interested in investing it's a must read in my opinion. I've been through it once, which took a while, and I'm about to go through it again because it's a very challenging read if you're new to the game. Accounting principals are very helpful when reading through it so I'd recommend learning the financial statements like the back of your hand and study up on accounting. He's got a section at the beginning of the book which is called, "understanding financial statements" which is very useful. You're going to have to take some time when you're reading it to look up definitions and concepts because it's definitely not a "beginners" book. Accounting is the language of business, which I stubbornly found out the hard way, so get as much of that under your belt as possible because it will only help. In the book the answers to most of your questions will be answered and definitely the one you asked. Investing is not all about formulas but they are useful. I don't believe their as good as a well thought out story though (mainly because I suck at mental math which is a symptom of not paying attention in high school). Once again, don't buy the book if you're not willing to do the work, but if you're extremely interested in investing then it's one of the smartest investments you could make. If you're not that interested in investing or business, I'd put my money into an index fund consistently over a long period of time if you're looking for an investment. Do with that information what you want, if you have any questions feel free to ask (I'm a newbie), and the books available on Amazon. Best of luck.
Thank you very much, I'll definitely give the book a read.
For FCFE(Free cash flow to equity), the formula is
FCFE= Net income - (Capital Expenditures - depreciation)-Change in Non-cash Working Capital + Net borrowings.
For FCFF(Free Cash flow to firm), The formula is
FCFF = Operating Income(1-tax rate) - (Capital Expenditures - depreciation) - Change in Non-cash Working Capital.
Note- It is important to Adjust the earnings by expensing R&D and Capitalising Leases. I would suggest you to read his famous Book 'Damoaran on Valuation' for more depth.
Excellent, rational, sane. In other words another great video, Professor. Thanks
Excellent post. I’d say the same thing I always say in my responses. Current and past numbers in companies like Apple, Amazon and others like Tesla, Netflix, Google etc are from current products and services. Part of a holistic valuation study perhaps should account for future cash flows not just from current products and services but also from future products and services. Now here’s the rub. Who knows what new businesses and markets companies like Amazon will enter, therefore how to account for future cash flows from future products and services in the valuation model?
Well, that’s why I think the valuation model must account for a DCF plus ‘X’ model rather than than just the DCF. The question is to ask then would be the value of X? That is the real options value coming from the optionality of these companies entering new markets and new business lines. Needless to say, Appropriate values for WACC have to be used for discounting cashflows for ‘X’. My 2cents..
Thanks Prof. I have seen many of your books in my schools' library in Australia. I'm young, but if I want to have any inklings of your analysis, which book of yours would you recommend and how should I got about reading them? (Cover to cover, or certain chapters first and then reference with other books?). I have studied a little regarding value investing, but I am still learning and I would like to learn as much as possible (especially regarding critical thinking, you make stocks seem so fun, the analysis seems to be very fulfilling). Your help will be much appreciated.
I've made substantial money in the market using your principles, strategy and thinking...Forever Grateful!
Amazing sir. Thank you very much. Wish you all the best.
Great Analysis....there is not much room for both companies to grow however like you put it, amazon may be disrupting more businesses out there. The one I cannot wait to see is pharmacy industry. Looking forward to hearing more on how you short Amazon or Apple.
On Amazon specifically, think this is spot on from a value perspective. Think the majority of investment in amazon comes more from a growth line of thinking. Which at the end of the day is just a different take on value. But in mind the growth thesis goes as follows. The market cap is around 1 trillion. So in order for this to be compelling how is it going to get to 2 trillion? And how likely are the things that underlay that thesis. In short, think it can hit 2 trillion on the following things. Retail hitting 500 billion. Not far fetched, WMT does this now, and Amzn potential should be bigger. Given the categories, and international nature of the business. AWS 100 billion of revenue. Again not crazy considering IBM did 90 billion a few years ago. Another 100 billion from ads, device sales, prime membership, and other new businesses. If it hits these in 8 years, it is by definition still growing, so a premium valuation gets assigned. Let's say 3 times revenue. That is a 2 billion company. Are there a lot of risks, sure. And think there is a solid case not to be long. But think there is also a solid case not to be short.
Can we please have an analysis on WeWork valuation?
Prof Damodaran may have sold something short? Are my ears deceiving me?
great analysis- thank you
thanks professor! learned a lot
Thanks sir ....
Regarding Amazon, it has been doing a good job growing. But not all markets will work long-term. They came first with cloud, but Google is catching up, is much cheaper, and coming with better Docker/Kubernetes solutions. Microsoft does a good job building solutions that support migration from AWS. I don't see much more Amazon is growing fast at right now, so while it may attempt to distrupt, it may not work, and the current bets may become tomorrow's losses, esp. once the debt becomes more expensive. My modelation gave me $750 - 850.
The operating lease expenses and the R&D expenses for Apple are Amazon's and need to be changed to Apple's.
You are absolutely right. Fixed now. I got lucky, since it barely changed the value.
"Smartphone company". I see companies all around the world forcing people to work on overpriced Mac computers. Even if someone wants a more performant computer for less money, they get Apple stuff, to keep the IT ops simpler. That locks companies with Apple, to a point. Not as much as with AWS though. Other part is that Apple is a big fashion amongst teenagers. That can be volatile, but if that sticks for few years, again, these will be buying laptops and all it needs because it's actually a crippled computer: better keyboard, bigger touchpad, adapters, docking stations with hdmi and audio jacks, better speakers, etc. Or - all kind of wireless stuff which apple will make sure won't work with non-apple hw (just try to charge your phone with Apple USB 3 charger - won't work because of 0.1 V higher voltage).
This is not a rant against Apple, just another PoV on whether Apple's growth will flatten.