How much is growth worth?

In my last post, I looked at the price being paid for growth by valuing the assets in place in a business. To make this judgment, I assumed that the business would pay its entire operating income to claim holders (as dividends to stockholders and interest expenses to lenders). The value of assets in place then becomes the value of the earnings in perpetuity, discounted back at the cost of capital.So, what is the effect of growth on value? To grow in the long term, you have to reinvest some or a big portion of your earnings back into the business, and the amount you have to reinvest will depend...

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How much are you paying for growth?

The debate about Facebook’s valuation is interesting on many dimensions, but one that is worth focusing on is how much growth is worth, and what you are paying for it. At one extreme are some value investors who argue that growth is “speculative” and that it is  worth very little or nothing. At the other are those who argue that growth is priceless and that you should therefore be willing to pay a “fortune” for it. Both groups seem to be in agreement that valuing growth is pointless, because it requires estimates that will be wrong in hindsight.  I had a series of posts on growth a few...

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Facebook: Sowing the wind, reaping the whirlwind

        Last Thursday, about 24 hours prior to the initial public offering, I posted on what I thought would happen on the opening day. I argued that this was the most pre-priced IPO in history, with transactions in the private share market providing information on what investors would be willing to pay for the stock. That was the basis for my view that those expecting a large jump on the opening day were likely to be disappointed and that this would be the Goldilocks IPO, with a 10-15% bump at open. I also felt that the stock was overvalued by about a third and that what happened...

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Facebook and "Field of Dreams": Hoodies, Hubris and Hoopla

In mid-February, I posted my valuation of Facebook and my thoughts on what would happen at the IPO. Since the actual offering date is tomorrow and the frenzy mounts, I thought it would make sense to revisit those posts.1. Valuation UpdateIn my February 16 post on the company, I attached my valuation of the company, based on the S-1 filing as of that date. Quickly reprising that valuation, I valued the equity in the company at $29/share (assigning an overall value of about $72 billion for Facebook's equity), with the following key assumptions:a. Revenues growing to $44 billion in ten years, with...

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Lessons learned, unlearned and relearned: A semester of online class

In January, I posted of my intent to put my valuation and corporate finance classes online. As I finished my last sessions in both classes today, I thought it would be a good time to take stock of what the experience taught me about the future of education and how online education can evolve.A quick review. I teach corporate finance and valuation classes to MBAs at the Stern School of Business at NYU and have done so for 26 years. While I have put my webcasts and material online for many years, I decided to both formalize and organize the online class this year, using a start up firm called Coursekit....

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