Introduction to Valuation

Jul 8, 2024

Lecture Notes: Introduction to Valuation

Course Logistics

  • Instructor: Mentioned the need to differentiate between emails for different classes (Corporate Finance and Valuation).
  • If contacting the professor, specify the class your question is about.

Historical Background

1986: Introduction to Valuation

  • The instructor started teaching at NYU in 1986.
  • Initially assigned to teach a course on Security Analysis, originating from Ben Graham at Columbia University.
  • Security Analysis was outdated by 1986: Focused too much on institutional details and outdated financial instruments.

Inception of Valuation Course

  • Proposal to teach a course on valuation was initially resisted due to perceived lack of content.
  • The instructor hijacked the Security Analysis course to start teaching valuation subversively in 1986.
  • Valuation course officially recognized in 2008.

Evolution of Valuation Thinking

Key Events and Learnings

  • 1987 Black Monday: Market dropped 22%; prompted investigation into market crises and valuation response.
  • 1990s Dot-com Boom: Learning to value companies with minimal revenue and business models (e.g., Amazon 1997).
  • 2008 Financial Crisis: Examination of systemic risk when financial institutions behave badly.
  • 2020 COVID-19 Pandemic: Valuing companies at the peak of market hysteria (e.g., Boeing in March 2020).

Practical Examples

  • Valuation helps understand market phenomena: e.g., GameStop 2021, analyzing behavioral finance.
  • Modern challenges in valuation involving new revenue models (e.g., valuing Netflix subscribers, Uber riders).

Class Philosophy and Structure

Approach to Learning

  • Valuation is a craft, not a science or art. It’s about gaining experience by actively doing valuations.
  • Encourages evaluating various types of companies throughout the semester (Valuation of the Week).
  • Price vs. Value: Importance of understanding the difference between pricing mechanisms and actual value.
    • Value is driven by cash flows, growth, and risk.
    • Price is driven by demand & supply, mood, momentum, and other market factors.

Concept of Faith in Valuation

  • Need to trust your valuation despite inherent uncertainty and market volatility.
  • Developing faith: Willingness to act on valuations (e.g., buying Tesla stock based on evaluated worth).

Storytelling in Valuation

  • Valuation as a bridge between stories and numbers.
  • Importance of narrative to justify numbers (e.g., Tesla as the largest auto company with an energy and software business).

Class Logistics and Resources

Lecture Notes & Recordings

  • All lecture notes are available digitally; Zoom recordings for classes will be available.
  • Additional resources: Blogs, newsletters, Weekly Challenges, video tutorials on specific topics.

Grading and Assessment

  • Group Project: Choose a company and value it throughout the semester; interim feedback is optional.
  • Quizzes and Exam: Three quizzes (each 10%), Final exam (30%), projects spread throughout the semester.
  • Emphasis on consistent engagement and application of learned concepts.

Participation and Group Dynamics

  • Encouragement for group participation and class engagement.
  • Self-formed groups, with assistance available for students who cannot find a group.
  • Participation: Not graded but encouraged for added learning experience.