I know where you are coming from, but if you have zero terminal value for a company after 10 years, then you'll likely never invest into any good/great company. No company will return to you its market cap within 10 years (even with zero discount rate).
If you look at the calculations in the table (the data is a bit cluttered but I posted the Excel file over on COBAF), you'll see that it gives a PE of 93 for Facebook assuming 50% growth for 10 years. OK, so 50% for 10 years is bogus. Let's say 30% and assume it will be higher early on and lower later. That would be a PE of 35 - which is above the current market. You're acting as if the numbers generated by the 10-year premise are insanely low, but they aren't.
And since you're assuming zero terminal value, you have to expect actual dividend return of the size of the market cap, since company will be worth zero in 10 years.
I'm thinking as a private owner who can take out 100% of unrestricted earnings as a tax-free dividend each year. It is true that all businesses require some capital reinvestment to grow - and so it might be more correct to reduce that % - but the best businesses can grow without reinvesting the bulk of their earnings (take See's).
I'm gonna turn around your argument: very very few companies are worth zero after 10 years.
Some people would say that anything that trades on a stock exchange is worth something. A larger group would say that anything that has current or anticipated revenue is worth something. Some would say that anything with a positive net current asset value is worth something. But from my perspective, a business is worth its current liquid assets (or liquidatable assets at realistic values) plus the conservatively projected future unrestricted cash flows discounted by conservatively projected inflation rates back to present value. From this definition, it follows that a business with zero net worth and zero or negative present/ anticipated unrestricted cash flows is worth zero or less. Such venerable businesses as MSFT, KO, and IBM have negative unrestricted cash flow after dividends and buybacks, and hence I consider them to have negative intrinsic value (adjusted for current shareholder equity). This doesn't mean the businesses would have no value to a private owner - it just means that their manager-owners are operating them in a way that is destroying shareholder value. But from this way of thinking, one realizes that even the best businesses will shift from value-creation to value-destruction over time. So to the contrary - I would argue a great many (perhaps >1/3) of Fortune 500 companies are worth zero or less to a passive owner. Of course, many may be better managed down the road - but the passive investor can't bet on that.
So DCF terminal value is not as stupid as you think it to be.
That's awesome. What multiple of earnings or cash flow should we pay for Facebook, and how did you arrive at that figure? |
