Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
8/20/2004
Contributors
David Trainer
kiran.akkineni@newconstructs.com
615-599-4462
Note
This document is available to clients
in the Research area of our site
www.newconstructs.com.
4%
3%
2%
1%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Kiran Akkineni
% of GDP
david.trainer@newconstructs.com
615-599-4462
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VALUATION PERSPECTIVE
8/20/2004
While it is not very likely that any one of these companies will achieve the
financial performance and resulting market dominance implied by their
stock prices, it is even less likely that all three of them will achieve such
domination simultaneously. In fact, it may be considered impossible for all
three to achieve market dominance given the overlap and potential
overlap in some of their businesses.
Figure 2: Combined Revenue as % of GDP versus WMT
5%
4%
3%
2%
GOOG, YHOO & EBAY Revenue CAGR = 30%
1%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
0%
WMT as % of GDP
In our opinion, the expected market values for Google, Yahoo and eBay
imply future financial performances that are potentially too optimistic. For
example, each stock assumes future profitability (economic profit margins)
meaningfully better than what the company has done in the past. And
each companys valuation requires at least 15 years of annual revenue
growth at 30% to justify its valuation. Few companies in the history of
business have been able to grow revenues at 30% for 15 years.
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VALUATION PERSPECTIVE
8/20/2004
Historical Performance
2002
2003
n/a
n/a
n/a
176.5%
28.0%
-22.7%
n/a
n/a
Required
Future Performance
Current Price
$100.00
30.0%
25.0%
15 yrs
Note: The values in this table represent the performance averaged over the respective times frames.
Sources: New Constructs, LLC and Company Filings
Historical Performance
5 Yr Avg
3 Yr Avg
2003
$32.55
$13.19
$22.52
29.8%
52.7%
75.5%
-17.8%
-16.2%
-12.5%
n/a
n/a
n/a
Required
Future Performance
Current Price
$28.00
30.0%
-2.8%
22
Note: The values in this table represent the performance averaged over the respective times frames.
Sources: New Constructs, LLC and Company Filings
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VALUATION PERSPECTIVE
8/20/2004
Figure 5: Historical Versus Future Performance Needed to Justify Valuation
eBay
Performance Hurdles
Stock Price
1. Revenue Growth
2. Economic Profit Margin (Avg)*
3. GAP (Growth Appreciation Period)
Historical Performance
5 Yr Avg
3 Yr Avg
2003
$35.95
$43.99
$64.61
76.2%
70.0%
78.3%
-50.1%
-13.8%
-4.5%
n/a
n/a
n/a
Required
Future Performance
Current Price
$80.00
30.0%
7.6%
21
Note: The values in this table represent the performance averaged over the respective times frames.
Sources: New Constructs, LLC and Company Filings
In our opinion, the expected market values for Google, Yahoo and eBay
imply future financial performances that are potentially too optimistic. For
example, each stock assumes future profitability (economic profit margins)
meaningfully better than what the company has done in the past. And
each companys valuation requires at least 15 years of annual revenue
growth at 30% to justify its valuation. Few companies in the history of
business have been able to grow revenues at 30% for 15 years. Even
fewer, if any, companies have generated such revenue growth while
driving major improvements in profitability at the same time.
For an analysis using different assumptions for Revenue Growth,
Economic Profit Margin or Growth Appreciation Period for any of these
companies, please contact the author.
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VALUATION PERSPECTIVE
8/20/2004
Off-Balance-Sheet Financing
LIFO Reserve
Unrealized Gains/Losses
Goodwill amortization
Unconsolidated Subsidiaries
Capitalized Expenses
Figure 7 shows the difference between Googles accounting profits and its
economic profits. The trend in profitability does not looks good for Google.
Figure 8 provides further insight into why this trend is in place.
Figure 7: Insight Into All the Costs Required To Run the Business
$150.0
Google
Reported versus Economic Profits
$ in millions
$100.0
$50.0
$0.0
2002
-$50.0
2003
-$100.0
-$150.0
Economic Profit
Net Income-GAAP
VALUATION PERSPECTIVE
8/20/2004
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VALUATION PERSPECTIVE
8/20/2004
Figure 9: Insight Into All the Costs Required To Run the Business
$ in millions
Yahoo
Reported versus Economic Profits
$250.0
$0.0
-$250.0
-$500.0
-$750.0
1999
2000
2001
2002
2003
-$1,000.0
-$1,250.0
-$1,500.0
-$1,750.0
-$2,000.0
Economic Profit
Net Income-GAAP
eBay
Reported versus Economic Profits
$600.0
$ in millions
$400.0
$200.0
$0.0
-$200.0
1999
2000
2001
2002
2003
-$400.0
-$600.0
-$800.0
Economic Profit
Sources: New Constructs, LLC
Page 7 of 10
Net Income-GAAP
VALUATION PERSPECTIVE
8/20/2004
Conclusion
In our opinion, the expected market values for Google, eBay, and Yahoo
imply future financial performances that are potentially too optimistic. For
example, each potential market value scenario assumes profitability
(economic profit margins) at or better than what the company has done in
the past. And each scenario requires 15 years of annual revenue growth
at 30% to justify its valuation. Few companies in the history of business
have been able to grow revenues at 30% for fifteen years. Even fewer
have been able to improve profitability at the rate that the respective
valuations imply while they generate 30% revenue growth for 15 20
years.
New Constructs does not purport to have an ability to predict the future.
On the other hand, we empower clients to assess the market predictions
reflected in stock prices with greater accuracy and speed.
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VALUATION PERSPECTIVE
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(615) 599-4462
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VALUATION PERSPECTIVE
8/20/2004
DISCLAIMER
The information and opinions presented in this report are provided to you for information purposes only and
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