Valuing an Internet Stock
One way is to start with the market price of the stock and determine what kind of revenue growth that price implies. The question then becomes whether that growth rate is realistic. Let's take Amazon.com. An analytical approach called Economic Value Added (EVA) indicates that with the stock at 214 a share, investors are implying that revenues will grow 59.6% a year over the next 10 years, taking annual sales to $63 billion from the current $587.6 million.
HERE'S HOW THOSE CONCLUSIONS WERE REACHED
MARKET VALUE (MV) = CURRENT OPERATION VALUE (COV) + FUTURE GROWTH VALUE (FGV)
WHAT'S KNOWN FOR CERTAIN? STOCK PRICE 214 SHARES OUTSTANDING 50.2 MILLION MARKET VALUE $10.8 BILLION WHAT ASSUMPTIONS HAVE TO BE MADE? SALES IN 1998 $587.6 MILLION OPERATING MARGIN 10% NET OPERATING INCOME AFTER TAXES (NOPAT) (ADJUSTED FOR STARTUP COSTS) $41.1 MILLION
-- To get current operation value (COV), start with 1998 adjusted net operating income after taxes (NOPAT), $41.1 million. What would $41.1 million over the next 10 years be worth? To get that number, a discount rate, or the cost of the capital needed to generate those earnings, has to be assumed. Because the stock is volatile, assume a high cost--15%. To get the COV, divide $41.1 million by 15%, which yields $274.2 million. With no future growth, that's what the company would be worth. A pittance--only $5.50 per share. Investors are obviously betting that growth will continue to soar.
NOW, IT'S EASY TO DETERMINE AMAZON'S FUTURE GROWTH VALUE
-- Next question: Can Amazon.com sustain that kind of growth? As E-commerce draws more competitors, it's probably an unrealistic assumption.
Updated Dec. 3, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.