On the topic of valuation, Professor Aswath Damodaran is one of the greatest communicators of our time. Recently, he sat down with another famous NYU professor, Scott Galloway, to discuss the valuations of some of the world’s leading technology companies. Professor Galloway is known for his engaging TED-style talks where he often discusses the strategies of the ‘tech titans’ and isn’t afraid to express his opinions about potential winners and losers. Given their respective specialties, I was understandably excited to see the two sit down for a half hour chat about the current valuations of these ‘tech titans’. You can watch the full video or read my highlights below.
A bottom-up approach to valuation
The traditional approach to valuation is top-down. This means that you start by projecting out a company’s revenues, then subtract expenses and capital spending, before applying a discount rate. Today’s ‘tech titans’ are increasingly measuring their success via the value of a user. Professor Damodaran suggests that it may be time to take the same approach in valuation and start with the value of a user, then build up from there.
Key factors in assessing the value of a user
- User engagement – how long do users spend using your service each day
- User loyalty – users that are more likely to stick around are worth more
- Upsell potential – how likely is it that you can sell your users more of your product.
- Netflix users have a high value as they’re unlikely to opt-out. Netflix users have a 95%+ renewal rate.
- Amazon Prime subscribers are valuable because they spend hundreds of additional dollars per year on Amazon merchandise.
- Twitter users have a low value as they’re not particularly engaged with the platform, making it difficult to monetise.
- Amazon looks ‘priced to perfection’. The only way the current valuation looks justified is if they can create a complete monopoly in every industry they’re currently targeting. However, Professor Damodaran says he wouldn’t bet against it.
- Snap has nearly 160M users – around half of Twitter’s, but the users are far more engaged. Snap is still overvalued, but getting closer to fair value. Snap is “one bad earnings report away from being a buy.”
- Uber’s basic business model is flawed. Low capital intensity allowed Uber to grow quickly, but it also means there are no barriers to entry, resulting in a weak network effect. Uber looks overvalued at $70B.
- Airbnb benefits from a global network effect, unlike Uber. At $25B, Airbnb looks closer to fair value but faces regulatory risk.
- Professor Damodaran expects Facebook to win the fight with Google for the advertising dollar. “Every action that Facebook takes is designed to make you stay in their ecosystem.”
- Google/Alphabet still makes 95% of its revenues from advertising. The search engine is a “sugar daddy”. Google is close to fair value, and has always traded within 10-15% of fair value.
- Apple is right at fair value. Professor Damodaran qualifies this; “whenever I get to that point, I sell the shares because you’re now playing ‘the next iPhone game.’” If the iPhone 8 doesn’t do well, Apple shares could drop by half, which would create a buying opportunity.
- Netflix has pivoted its business model to focus on original content. At its current price, it’s “a little overvalued”, but Professor Damodaran is keeping it on his radar.
In the full video, Professor Damodaran explains why Facebook’s $19B purchase of Whatsapp wasn’t as silly as it looked, and shares his view on the valuation of each of the ‘titans’.
Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.