Need to Know: How the dean of valuation prices loss-making tech stocks — and his views on Amazon, Netflix and Airbnb


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.”

“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 favor. “All I need is to match the market and make a little bit more,” he says. “People who go out looking for 10 baggers off the top are asking to be scammed,” he adds.

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.
    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, he adds.
  • Ark Investment Management’s success, he says, is identifying macro trends and people’s behavior toward technology. “I think sometimes when they do valuations, they are removing all doubt about the fact that they really don’t know what they’re talking about,” he says.
The chart

The market and the Fed are pretty close in the interest-rate outlook, at least for the next few years. The difference really is further out — by 2025, the market is nowhere near the Fed’s long-term rate view.

The buzz

Property developer China Evergrande

surged in Hong Kong trade on indications it’s working to pay off creditors. One investor, Chinese Estate
said it may sell its entire stake in Evergrande.

Jobless claims, preliminary purchase managers indexes and leading indicators data highlight Thursday’s economic releases.

Costco Wholesale

and Nike

are due to report quarterly results after the close.

The market

Stock futures


were gaining ground a day after the Federal Reserve took a step toward tapering. The yield on the 10-year Treasury

was 1.34%.

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