Have you ever wondered how professional investors value a stock?
Well today, I'm going to teach you all about valuation. What's up everyone, my
name is Ben. I'm a former J.P. Morgan investment banking analyst and welcome
to rareliquid the best channel for tech investing
Like I mentioned in my last video I'm going to be using Coupang as an example
for this valuation lesson so if any of you guys are thinking about
buying the company after its recent IPO hopefully this is a helpful video for
you but as always remember that I am not a financial advisor so please treat all
content as entertainment purposes only and make
sure to use it just as like a starting point for your own research
Alright with that said, let's get started the first thing I want to do is go over
a few key terms that you need to know The first concept is enterprise value
which equals your market cap + debt + non-controlling interest +
preferred stock - cash If most of these are totally new
concepts to you, don't worry. The main ones you really
need to know are market cap, debt, and cash because the other two are a bit
abnormal but I'll leave a definition of these in the comments below
Equity value, which is also known as your market cap, is pretty simple
It's just your share price times your number of shares
Your debt and your cash are probably self-explanatory
if a company borrows money, then it has debt. If it doesn't have zero debt and
the company can also have a cash balance But what may not be clear is the
difference between enterprise value and equity value,
and I think the best way to really explain this is through an analogy
Imagine that you're driving you see a beautiful house and you go up to it
knock on the door and tell the person who lives there and owns the house
"Hey i want to buy your home." Let's say the homeowner was looking to sell and he
bought the house through a mortgage with the local bank for one hundred thousand
dollars This one hundred thousand is the
enterprise value. The homeowner says that he has put in $30,000,
which is the amount of equity he put into the home and that's pretty
much akin to a company's market cap. This leaves the
mortgage loan remaining on the home of $70,000 and that's
equal to a company's debt Lastly you subtract out your cash when
calculating your enterprise value because basically a company could use it
to pay off its debt Now I'll be moving on to some of the
other key terms I'll be using throughout the rest of the video
First there's Net Debt which is just your debt minus your cash
Second is LTM which stands for last 12 months
Gross Margins is your gross profit divided by your revenue
Gross Profit is your revenue minus your Cost of Goods Sold
and lastly there's EBITDA which is your operating income plus depreciation and
amortization and this is what many finance people use
as a proxy for how much cash a company is generating
To go over all of these with an example, imagine you have a t-shirt selling
business and you sell t-shirts for ten dollars each that cost
two dollars to make and you're selling ten of them
This gives you a total revenue of one hundred dollars
your cost of goods sold is ten shirts times two dollars so twenty dollars
Your gross profit is one hundred dollars minus twenty dollars which gives you
eighty dollars Your gross margin is eighty dollars
divided by your revenue of one hundred dollars which gives you 80%
And let's say operating expenses which include things
like sales and marketing and wages to employees
costs sixty dollars, so your operating income is eighty dollars minus sixty
dollars, which gives you twenty dollars and this
is also known as your EBIT Then let's say that you have ten dollars
in depreciation expense, and so your EBITDA is twenty dollars
plus ten dollars, giving you thirty dollars and thus your EBITDA
Margin is 30% Alright, now that you know the terms
I'll be using, I'll show you now how to value a company using Coupang as an
example But there are two things I want to
mention beforehand and the first is that there are multiple different
ways to value a company and they range in complexity
The four main ones are the Discounted Cash Flow analysis, Leveraged Buyout,
Transaction comps, and Trading comps and we're going to only be covering the last
one I decided to talk about trading comps
because it's a really simple basic fundamental analysis that anyone can do
The second thing I want to mention is that you can find all of the data I'm
about to show you on financial data aggregating sites like yahoo finance or
wallmind.com but it's important to note that a lot of
times these websites are incorrect so I actually had to manually go and
change and fix some of the numbers that you're going to
see soon, by going into the company's actual financial filings
Okay so back to trading comps. Trading comps is a relative valuation
methodology in which you compare the financial figures amongst a set of
similar companies to figure out what your target company
is worth. The first step involves getting a group of similar companies together
which oftentimes can be the hardest part because it really requires you to
understand an industry For our purposes you can see the list of
companies I chose and will be comparing against Coupang
and all of these companies are pretty big e-commerce players but
many also have other divisions and these companies are also located all over the
world This is actually one of the problems
with trading comps. You'll never really get an apples to apples comparison when
you're comparing companies because they differ
so much in geography management teams, different products that they sell,
and so it's not really a perfect analysis but it is one that really helps
you figure out and give one data point of what
valuation your company should be at The second step involves gathering
financial information which are all the ones I explained earlier on
in the video the financial information can completely differ so these aren't
the ones that you have to have, but they're just the ones I chose for
the video but the one metric I didn't explain
earlier and honestly what the one that is the most important are multiples
which is on the very right over here There are many different kinds of
multiples but the one we're using today is enterprise value divided by last 12
months revenue There are also ones like enterprise
value over EBITDA and you've probably also heard of PE multiples
but basically what these numbers represent are how many times
investors are currently willing to pay for every dollar of revenue earned in
the last 12 months for each company. So for Alibaba,
investors are willing to pay six dollars for every one dollar in revenue earned
while for Sea, investors are willing to pay nearly $26
As you may have already deduced on your own the higher the multiple,
arguably the more expensive or overvalued a company is,
but of course there's a lot more to it than that. When a company is trading at a
really high multiple usually it's a sign that investors
really believe in the company and believe that there's a lot of future
growth ahead and that the company will outperform. At
the same time, there are times when investors pile too much into one stock
and valuation gets really stretched and so that's when you want to stay away
from a company that has a multiple that you think is way too high
Another thing I want to note is that usually for trading comps you want to be
always looking into the future, not the past
Right now we're looking at last 12 month sales because looking into the future
and getting consensus estimates you have to pay a lot of money for that
kind of information and frankly the average investor like you and me just
we don't have access to that information The third step is to compare the
financial figures against one another and understand what's driving them and
this is really where there are no clear-cut answers
So let's go through each of these columns one by one. First off we have our
market caps, and in an ideal world you want to have companies that are
around the same size as the company you're valuing
but most of the time that's not really possible. In our case Coupang's market cap
is 87 billion dollars and so Amazon, Alibaba, and Samsung are
way bigger than coupon so when I'm looking at these numbers I'm mentally
putting more weight into the others on the list. In our next
two columns, we have net debt and enterprise value which I
discussed earlier and what's important to note here is that sometimes net debt
makes a big difference like it does for Alibaba
but not so much for companies like Mercado Libre
In the next column we have revenue growth and as you can see Coupang has the
highest amongst all its peers besides Sea, which is a great sign for Coupang. But at
the same time you don't want to get too carried away with the revenue growth
because the size of that company and their
revenue really matters. When you're a much smaller company it's much
easier to grow faster just as how if you had a friend who made
100 million dollars from 50 million dollars. That would be a lot more
impressive than if someone made one dollar from 50 cents
One other thing i want to point out is that Coupang generated nearly all its
revenue from e-commerce and Coupang Eats which is food delivery
And last year Covid really boosted that space and a lot of these companies
received a similar boost but some more than others and you just can't
expect these kinds of growth rates moving forward
In these next columns are where things get pretty interesting
We see that coupon has the lowest gross margins and EBITDA margins amongst its
peers, which is a bit concerning. What is
especially concerning is that when a company scales
it should become more efficient and Coupang is already generating more
revenue than Sea and MercadoLibre but has worse margins
It's helpful to compare these numbers because
just by looking at them you can see that you really need to dig into
why Coupang's margins are so much lower and what you can expect in the future
Now we move on to the revenue multiples to tie everything together and I'll go
through a few examples to show you how I would think about them
Amazon earns 30 times more revenue than Coupang and so it's crazy that the
company grew at 38% The company also has really solid
margins, largely and thanks to AWS and so a four-time
sales multiple seems pretty reasonable compared to the rest of the
peers. Alibaba also has pretty outstanding numbers and looks attractive
and if it was a US-based company the sales multiple would probably be a lot
higher but due to the risks in China that's
probably why the stock has been hammered lately. Sea
and MercadoLibre are two pretty good peers but they're based in Southeast
Asia and Latin America respectively, so totally different markets. But what's
important to note here is that these companies are trading at really really
high multiples compared to Coupang and to me even though their margins are
higher I think the story is more about the total
addressable markets of these companies rather than really the numbers you see
here Coupang right now is limited to the
Korean market which has around 50 million people
while Southeast Asia and Latin America have well over 600 million people each
Korea has one of the highest internet and smartphone penetrations in the world
while Southeast Asia and Latin America technology in those areas
penetration is still growing rapidly and so investors may be justifying a high
multiple by just saying these markets are going to grow
sustainably in the future while for korea Coupang already has 15 million
of the 50 million total number of potential customers and so
unless Coupang really diversifies and enters into new markets
the growth may be limited and that's why you might see a lower multiple for
Coupang The last two I want to discuss are Naver
and Kakao which are two Korean-based companies
These companies are trading at much higher multiples than Coupang
which may suggest that Coupang is trading at an attractive value,
but there is also a bit of a challenge comparing
these companies because they have higher EBITDA margins and also trade on the
korean stock market while Coupang trades on the New York
Stock Exchange. Still, I think that they are good reference points and this leads
me to the last step of trading comps which is determining your implied
valuation I'll next be calculating what I think is
a fair price for Coupang But really quickly before I do if you
guys want an excel spreadsheet sent to you each week with a bunch of
data for high growth stocks organized for you,
consider subscribing as a Gigabyte Patron. I'll be upgrading this sheet over
time and later on it'll include a trading comps and DCF templates so you
can run your own analyses Anyway back to the topic at hand to
calculate Coupang's implied share price What i'm doing is multiplying my
operational financial metric which in this case is last 12 months revenue
and multiplying it by the multiple that i think the company should be trading at
for me I'd be more comfortable to start buying if Coupang traded in the range of
four times to six times which implies a share price of twenty
eight dollars to forty two dollars I would aim to start about twenty five
percent of my position at six times revenue if Coupang ever went down to
forty two dollars and dollar cost average down if the
price keeps falling My reasoning for four times to six times
multiple is that Coupang really has a lot of
issue generating cash. Coupang's 11 billion dollars is pretty impressive but you
have to remember that they're pretty much just helping merchants sell their
items and they record that as revenue versus companies like Kakao and
Naver which also have e-commerce divisions but also
sell products that require things like subscription
and other services that are a little bit hard to earn revenue but
has a better, healthier margin. In addition to this Coupang,
as of now is currently limited to just the korean market
and so as an investor what I'd like to see before justifying
a higher multiple or the seven times multiple it's trading at right
now is some signs or execution that the company is able to
create a really cash generating business like Amazon did with AWS,
or that the company is able to successfully execute in
another country to pretty much just open up and
increase its total addressable market Now with all this said as I did mention
in my previous Coupang video I am a customer myself and I think the
company offers the best service in all of the e-commerce competitors
that are out here in Korea and so I think that especially given
that the company has been able to already reach 15 million customers
is probably going to reach more than 20 million in the coming years, there's just
going to be so much opportunity for the company
at a huge scale like that to launch different businesses
and potentially dominate in the different industries that they enter
into and so I'm willing to take the risk of
entering at around a six times multiple and if it drops even further than that
I'll probably increase my position. I do have to add that this is all a pretty
simplistic analysis and so if I wanted to get a better hold
evaluation, I probably would want to run a Discounted Cash Flow analysis on
Coupang if a video on discounted cash flow or if
this video was helpful please let me know in the comments below
so I know to make more of these types of videos
With that said, that wraps up the video as always thank you so much for watching
hopefully I catch you in the next one Thanks so much, peace out