9780130406521

The comprehensive guide to valuing technology companies Projections for future revenues, earnings, cash flows, the impact of stock options, and more 5 detailed case studies cover the entire tech lifecycle: Amazon.com, Ariba, Cisco, Motorola, and a new IPO Presented by one of the world's leading experts in valuation State-of-the-art tools for assessing the value of any technology company Technology companies have exploded in importance, yet investors and analysts face unprecedented challenges in valuing them. In The Dark Side of Valuation, one of the world's leading valuation experts reviews every approach, demonstrating exactly how to adapt traditional techniques to minimize risks and maximize returns. Aswath Damodaran begins with an overview of the markets' dramatic shift towards technology stocks - specifically new technology stocks. He then identifies key valuation principles and techniques, demonstrating them through five case studies that encompass the entire technology company lifecycle: Amazon.com, Ariba, Cisco, Motorola, and a new IPO-ready startup. Coverage includes: Adaptation of discounted cash flow models for tech companies with limited histories, shifting business mixes, and volatile stock prices The limitations of traditional accounting definitions in measuring technology company cash flows Superior processes for estimating future revenues, earnings, and cash flows Evaluation of the impact of management and employee stock options on share value and earnings multiples An in-depth assessment of PEG and price-to sale ratios Relative valuation: fundamentals, earnings multiples, and revenue multiples " What a refreshing book to read! Damodaran's book is essential if capital markets are going to accurately gauge the contributions of emerging companies...His insights are illuminating and his mastery of financial analysis is unmatched. " -Louis Columbus Director of Marketing, Linksys

Aswath Damodaran is Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. Damodaran has written two books on equity valuation (Damodaran on Valuation and Investment Valuation), as well as two books on corporate finance (Corporate Finance: Theory and Practice and Applied Corporate Finance: A User's Manual). He also published widely in leading journals of finance, including The Journal of Financial and Quantitative Analysis, The Journal of Finance, The Journal of Financial Economics, and the Review of Financial Studies.

Damodaran received the Stern School of Business Excellence in Teaching Award in 1988, 1991, 1992, and 1999. In 1194, he was profiled in Business Week as one of the top 12 U.S. business school professors. Damodaran holds M.B.A. and Ph.D. degrees from the University of California at Los Angeles. Prior to joining NYU, he served as visiting lecturer at the University of California, Berkley from 1984 to 1986, where he received the Earl Cheit Outstanding Teaching Award in 1985.

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PrefaceDo the old rules still apply? Do we need new valuation metrics, or are the old metrics flexible enough to deal with the companies that constitute the new economy? Can you value a company that has no earnings, no history, and no comparable firms? These are the questions that I have heard repeatedly over the last few years. I have always believed the fundamentals that determine value are the same, no matter what company you value and what market it is in. Increasingly, though, I have faced skeptical audiences who are unwilling to take this belief at face value and have demanded proof that America Online, Amazon.com, or Priceline.com can be valued with traditional models.The genesis for this book was a paper I did on valuing Amazon.com in March 2000, where a discounted cash flow model yielded a value of $34 per share. Since the stock was trading at $80 at that time, there were many who viewed the valuation as either excessively pessimistic or as missing something. The interest in the paper led me to think about writing a book, but I expanded it to cover both new technology and old technology firms. While there are differences in estimation that arise across these firms, I believe that they have far more in common. Why technology firms? I believe that traditional valuation books and models (and I count my book on investment valuation among the culprits) have tended to concentrate on valuing manufacturing or traditional service firms. Technology firms are different. They expand by investing in research and through acquisitions and not by building plant and equipment. Many of them have astronomical growth rates in revenues and often, very little in current earnings. Their assets are often patents, technology, and skilled employees. I look at how the notions of capital expenditures, operating income, and working capital have to be redefined for these firms.I begin this book by laying out the facts on the growth of technology and, in particular, new technology stocks in the equity market and argue that although the principles of valuation might not shift, the focus can change as firms move through their life cycles. This discussion is followed by an extended section (Chapters 2-7) on applying traditional discounted cash flow models to value technology stocks, with an emphasis on the estimation of cash flows, growth, and discount rates for these firms. In the next three chapters, I look at the use of relative valuation to value technology companies, both in terms of adapting existing multiples (such as price-earnings and price-to-sales ratios) and developing new ones (value per Web site visitor, for instance). In Chapter 11, "Real Options in Valuation," I consider an argument made by many for the large premiums paid on technology stocks (i.e., they represent real options to expand into a potentially huge e-commerce market), and consider some questions that a skeptic should ask before accepting this argument. In Chapter 12, "Value Enhancement," I consider how managers of technology firms can enhance the value of their firms through better investment and financing decisions.The book is structured around the valuations of five technology firms-Motorola, Cisco, Amazon.com, Ariba, and Rediff.com. The first three are household names but represent three different points in the technology spectrum. Motorola is an old technology firm with substantial investments in existing assets. It is also a firm that has fallen on hard times in the last few years, largely as a consequence of poor investments and strategic choices. Cisco is one of the great success stories of the 1990s, but a great deal of the market value of the firm reflects expectations about the future. It is also a firm that has chosen to grow through acquisitions and has done it very well. Amazon.com is the poster child (for better or worse) for the new economy stocks that have entered the market in recent years, and the popular press has d

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The Dark Side of Valuation Valuing Old Tech, New Tech, and New Economy Companies

The Dark Side of Valuation Valuing Old Tech, New Tech, and New Economy Companies

013040652X

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