This short tutorial is designed to walk you through each step of valuing a company on the Intrinio Valuation Webapp.
The Valuation platform enables you to scenario test the value of companies under different circumstances. For example, you could run and save three different valuations that show the value of a company as a base case, bearish/downside or bullish/upside.
In this tutorial, we're going to calculate the intrinsic value of Tiffany & Co. (NYSE: TIF) under the scenario of a recession in 2016.
Step 1: Go to www.intrinio.com and sign in. If you have not already registered, click "Register" in the upper right hand corner and follow the directions.
Step 2: Click on "Valuation" >> "Create a Valuation" in the top header bar.
Step 3: A modal will pop up with two entry spaces. In the first entry box, name your Valuation "Tiffany & Co Recession Scenario". In the second entry box, type TIF. Click "Create".
Step 4. The Valuation will immediately open up, and you'll see your Valuation title at the top, as well as the Intrinsic Value, the most recent stock price, and the Margin of Safety.
The Intrinsic Value represents the inherent worth of a company. It is the present value of all of the future cash flows the company will generate. Typically, it differs from the current stock price. When the Intrinsic Value is lower than the stock price the company is overvalued, and when the Intrinsic Value is higher than the stock price the company is undervalued. The Margin of Safety represents the difference between the intrinsic value of a stock and its market price. In theory, the further a stock's price is below its intrinsic value, the greater the margin of safety against future uncertainty and the greater the stock's resiliency to market downturns. In short - a higher Intrinsic Value and a higher (and positive) Margin of Safety is better.
The Initial Intrinsic Value and Margin of Safety that you see at the top are simply a baseline. They are calculated based off of default assumptions derived from both Wall Street Consensus Data and Mean Reversion calculations. Valuation is as much of an art as it is a science - it requires human input. You'll want to adjust the assumptions used in the model to more accurately reflect the true intrinsic value of TIF during a recession. These initial numbers are simply a starting point.
Step 5: This first page we're on is the Assumptions page. We've boiled the Valuation down to 5 main assumptions that drive the DCF model. 3 Cash Flow assumptions (Revenue Growth, NOPAT Margin and Invested Capital Turnover) in a graphical form, and 2 Cost of Capital assumptions (Credit Spread and Company Specific Risk Premium) with slider bars. You can flexibly adjust all of these values here on the Assumptions page.
First off is the Revenue Growth graph. You'll see the historical data pull in on the left hand side and the default assumptions for future revenue growth populate on the right hand side. Given that TIF is a luxury goods company we will want to drop the Revenue Growth assumptions. Luxury goods companies do not preform well during recessions.
Click on the green dot above the year 2016 and drop it down to -1.64%. Drag 2017 down to -0.05%, drag 2018 down to 1.36%, and don't change 2019. (You can also double click on the dot and manually type it in.) Click the green "Save" button in the upper right hand corner. You'll see the intrinsic value re-calculate at the top.
Step 6: The next assumption is the NOPAT or (Net Operating Profit After Tax) Margin. For a luxury company like TIF, during a recession, we can expect this Margin to collapse as well. Click on the green dot above 2016 and drag it down to 12%. Drag 2017 down to 11%, drag 2018 down to 10%, and drag 2019 down to 10.25%. Click the green "Save" button in the upper right hand corner. You'll see the intrinsic value re-calculate at the top.
Step 7: The last cash flow assumption is Invested Capital Turnover. During a recession, it's typical for a luxury goods company to have stabilized Invested Capital Turnover. The default values here are already fairly stabilized, so let's leave this as it is.
Step 8: The first Cost of Capital assumption is the Credit Spread on the Cost of Debt.
This is an evaluation of the riskiness of the debt. Increasing it adds a premium to the Cost of Debt based on the risk that the company will default on their debt. The Credit Spread is calculated in Basis Points (bps). This is a common unit of measurement for interest rates and other financial percentages. One bps is equal to 1/100th of a percent (0.01% or 0.0001). In other words, a 1% change = 100bps and a 0.01% change - 1bps.
During a recession, debt becomes substantially more risky and more companies default. Let's raise the Credit Spread. Click and drag the green dot up the slider bar to 350 bps. Click the green "Save" button in the upper right hand corner. You'll see the intrinsic value re-calculate at the top.
Step 9: The last assumption is the CSRP (Company Specific Risk Premium). This additional premium has been added to account for company specific risk scenarios as well as any faults in the CAPM model. This is where you can account for any personal knowledge about the company or insights you've gained from research. Some factors to consider when increasing or decreasing this premium include:
- Company size
- Access to Capital Markets
- Breadth of Customer Base
- Geographic Area
- Key Executive Dependency
- Limited Product Line
- Litigation/Regulatory Risk
- Industry Volatility
For example, when valuing smaller companies, you'll want to increase the CSRP. The CSRP is a fairly long-term assumption, so it shouldn't be altered too much based on a recession in 2016. However, equity does become more risky during recessions, so let's increase this premium to 1.5%. Click the green "Save" button in the upper right hand corner. You'll see the intrinsic value re-calculate at the top.
And you're done! We've calculated the intrinsic value of TIF in the event of a recession in 2016 to be approximately $22/share and significantly overvalued. TIF would not be a wise investment in this scenario.
The only changes needed to complete a Valuation are on the "Assumptions" page. However, a wealth of additional information is provided within the Valuation. Other tabs such as the "WACC" and "DCF" show you exactly how those calculations are being made and exactly how your assumptions translate into cash flows. We also provide each of the financial statements (Income Statement, Balance Sheet, Statement of Cash Flows) as well as a multitude of Metrics and Ratios. All of this additional information is meant to aid you in adjusting your assumptions to arrive at an Intrinsic Value and make wiser investment decisions.
If you run into issues or have any questions, please feel free to contact us at any time on the Contact Page, or click the green "Help" button in the lower right hand corner of the screen.
If you haven't heard of Fintech in the past few years, you're probably living in a Faraday cage. Fintech companies use technology to disrupt existing financial services. This entrepreneurial industry has sprung from disgruntled financial employees and even large banks themselves, bleeding into an industry that has historically resisted change, technology, and innovation. It encompasses everything from payments to trading, and there is no question that Fintech innovations are stirring up controversy.
It used to cost (at a minimum) between $200 and $500 to execute a trade in the stock market. Today, due to the rise of companies like RobinHood, you can execute a trade for free. Transferring money overseas used to be an arduous and expensive process, taking weeks to execute. Now companies like TransferWise are performing these transactions for up to 10x less than the typical bank. Robo-advisors like Wealthfront are eliminating the need altogether (especially among millennials) for a financial advisor.
It's easy to see why this revolution has some people worried. In many cases, the argument could be made that these companies are eliminating the need for many different financial services jobs and even for existing institutions altogether. But is it the case for all fintech companies? At Intrinio, we believe Fintech has the potential to improve existing businesses rather than eliminating them. Far from eliminating the need for the human touch in financial services, new technologies can increase the impact of these companies and their employees by providing the tools they need to provide value for their clients.
Intrinio's technology operates primarily within the realm of Valuation. We've built an application that automates a large part of the valuation process for publicly traded companies. A user simply enters a ticker, adjusts a few assumptions, and is given the intrinsic value or inherent worth of the company. Any seasoned Valuation professional will tell you that valuing a company is both an art and a science. The science is undeniable, typically relying on a discounted cash flow model (DCF), and the calculation of a weighted average cost of capital (WACC). Although the valuation relies heavily on these methods and calculations, human insight is invaluable to the model. For example, an analyst might know that pharmaceutical companies tend to perform well in recessions (so don't plunge those revenue growth assumptions quite so much) or that the cost of oil has risen substantially (so lower the NOPAT margin assumptions for your valuation of an airline with an unhedged gas position). No matter what, human input is and always will be of paramount importance in valuing companies.
Having come from both financial and technological backgrounds, the team at Intrinio fully understands the value of Fintech for human beings, and this knowledge forms the basis for the design of our platform. We wanted to build a technology that would automate the mindless parts of performing a valuation so that users can spend more time adding value where no machine can. Our Valuation platform doesn't eliminate the need for a human - rather it makes the job of valuing companies easier and increases the quality of analysis.
Intrinio is just one example of the ways in which Fintech is transforming the financial landscape. Not everyone is building technological innovations that enable humans to do their jobs better - some are building technologies that remove the need for human work altogether. But how much should this worry us? Is this a change we should resist? Even the big banks have begun to embrace these new disruptive companies, funding them, incubating them, and even acquiring them.
Peter Thiel, a well-respected entrepreneur, venture capitalist, early investor in Facebook and co-founder of PayPal, has spoken out against resistance to technological change. His discussion focuses mainly on robots, but the parallels are hard to ignore. He claims "It's a problem we would like to have...It would free people up to do far more productive things." The team at Intrinio has built our platform to do just that. We automate the repetitive, manual and mindless parts of gathering financial data and performing a valuation so that the user can spend their time more productively and focus on what matters. Time usually spent manually entering data or ensuring that formulas are calculating correctly can instead be focused on the assumptions driving the model.
While it's inconceivable to directly compare the Fintech revolution to the larger revolutions of the past, it's helpful to take a look back and compare. During the Second Industrial Revolution of the late 1800's innovations such as mass production and production lines significantly increased productivity. It took less people less time to make products because of the steam engine. Jobs were lost, but more were created. Intrinio’s platform allows analysts to produce more valuations in less time. As more of an analyst's time is freed up to focus their attention on details, the quality of their work will improve.
We see today, just as we did with the Industrial Revolution, a resistance to new technologies. Is this Luddism, or simply a concern for the future of human work? We have already begun to observe labor’s reaction to technological displacement. And while some Fintech companies are undoubtedly displacing workers, the argument can be made that they are being placed into more effective positions. At Intrinio, we strive to continue building technological innovations that create more efficient workers, higher quality work, and positive change within the financial industry.
As value investors, we tend to live in the domain of spreadsheets. Value investing is the strategy of finding stocks that are undervalued relative to their intrinsic value, or inherent worth. The intrinsic value of a stock is the the sum of all cash flows that a company will generate in its perpetual existence, discounted at the weighted expected return of the debt and equity investors in the company. Traditionally, investors have used Microsoft Excel to build complex discounted cash flow (DCF) models to estimate the cash flows generated by the company and a weighted average cost of capital (WACC) model for estimating the weighted expected return for the firm. This practice is one of the primary activities of any financial/investment analyst and there is even a Financial Modeling World Championship to showcase the best of the best at this art.
While there are many reasons to build complex financial models in Excel, the intrinsic value of a company's stock can be calculated much more simplistically using a standardized system. This is what we've created at Intrinio. Our web application brings the flexibility of Excel onto the web without the complexity of a having to manage a spreadsheet filled with calculations or bad data. This makes it very easy for performing scenario testing, value driver analysis, or sensitivity testing. Merging this with an easy-to-use user interface, Valuation is exactly what value investors need to bring their investment analysis to the next level.
Because of the difficulty of managing financial models in Excel, most value investors tend to focus on Valuation ratios, such as the Price-to-Earnings ratio, the Price-to-Book ratio, the Enterprise Value-to-EBITDA ratio, the Enterprise Value-to-Revenue ratio, etc. Comparing these valuation ratios to those of similar companies, industry aggregates, or the S&P 500 aggregate, along with other performance metrics provides an indication of whether a company is over- or under- valued. Valuation ratios are in essence a single period cash flow perpetuity. A Price-to-Earnings ratio can be disaggregated to equal 1 / (Cost of Equity - Long-term Growth Rate) and the intrinsic value equal to next years expected EPS multiples by the calculated Price-to-Earnings multiple.
For example, Apple's cost of equity is 8.66% and has an expected long-term growth rate of 2.47% (1 / (8.66% - 2.47%)) equals a Price-to-Earnings multiple of 15.97x. Based on Zack's EPS Wall Street Consensus Estimate of $8.51 for the current year, the intrinsic value of Apple based on this basic model is $135.90, which is approximately 6% above the price of Apple of $127.39 as of April 6th, 2015.
While this simplistic model is nice for giving an approximate intrinsic value quickly, in many cases a single period perpetuity is not an accurate reflection of the company's strategy and earnings generation. For example, during a recession, a single period perpetuity would likely understate the intrinsic value of the company, given an expected rebound in revenues and margins in the coming years. A company may be making large capital expenditures in the current year, which are expected to generate greater revenues and margins in the future. Therefore, to assess the company's intrinsic value, a focus on cash flow generation based on the current company's strategy, the industry competitive landscape and the macroeconomic environment is much more complex than a simple approximation of the Cost of Equity and the Long-term Growth Rate.
With Intrinio's Valuation Webapp, we allow you to estimate the revenue growth, net operating profit margin after tax, and the invested capital turnover to forecast the free cash flows to the firm for the next five fiscal years. We also allow you to change the spread on the long-term debt to assess the riskiness of the debt and the company specific risk premium to assess the riskiness of the equity above or below that of a modified capital asset pricing model cost of equity. These assumptions combine to create a discounted free cash flow to firm intrinsic value model, which can help you calculate the intrinsic value of any company. Because of how simple it is to use Valuation, you can easily perform scenario testing, such as understanding what Apple is worth if there were a recession in 2016. The flexibility of this web application provides value investors an invaluable tool to make better investment decisions. We have taken the complexity of an Excel valuation model onto the web, while providing a user experience that makes it fun and easy to really understand how and why a company offers a high probability of a good investment opportunity.
The previous video was presented at the Digital-Life-Design (DLD) Conference, which occurred in January of this year. In this 15 minute clip, Scott Galloway discusses the Four Horsemen of technology: Amazon, Apple, Facebook, and Google. Each has carved its own niche in the modern technology world and plays a major role in the lives of most Americans and even most people in the world. With 1.75 billion smartphones in the world connected through the internet via mobile networks and wi-fi, we can begin to grasp the power that these companies have to shape the future evolution of technology.
At Intrinio, we offer full access to a whole host of financial data on these companies through our API, Excel add-in and Google Sheets add-on. We have used Intrinio data to analyze the trends observed by Professor Galloway. You can find all the supporting data in the Four Horseman Google Sheet, which was gathered using the Intrinio Google Sheet add-on.
Before we begin, it's interesting to make the observation that back in 2000, only Amazon and Apple were publicly traded companies. Amazon was a poster-child of the dot-com bubble and Apple was starting to find success in redefining itself. Google was beginning to make an impact on the internet with its revolutionary search engine and had just launched AdWords. Mark Zuckerberg was 16, had just transferred to Phillips Exeter Academy and was still four years away from launching The Facebook. The main point here is that 15 years ago, at the apex of the technology bubble in 2000, none of these companies had a dominate market position. Realistically speaking, only Apple had experienced major success. We can expect the next 15 years to be similar, with new entrants disrupting existing companies as technology evolves. However, it is likely that a major paradigm shift must occur for one or all of these players to lose their position as the Four Horsemen of the mobile era. Each of these companies are where they are today because they successfully transitioned their revenue models from a desktop environment to a mobile environment and were able to continue capturing market share as others failed to adapt.
Lets take a look at the recently reported last twelve months revenues and Zack's consensus revenue forecasts for 2015 and 2016 for the Four Horsemen:
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" chart="Pie" title="Reported 2014 Revenue ($mm)"]
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1961885633" chart="Pie" title="Zack's Wall Street Consensus 2015 Revenue ($mm)"]
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="830162448" chart="Pie" title="Zack's Wall Street Consensus 2016 Revenue ($mm)"]
As these pie charts illustrate, Amazon and Facebook are the current projected winners by Wall Street analysts, growing their revenues faster than Google and Apple. Apple is projected to increase its share in 2015, but slide slightly in 2016, while Google is projected to lose steam in 2015 and 2016.
When looking at the following graph, it is interesting to note that the profit margins of three of the Four Horseman are very close to one another. Amazon trails behind. This is largely expected since Amazon is the only primary retailer of the group and retailers tend to have much lower profit margins. However, its made up for in a high asset turnover. Yet what's most interesting here is that Amazon has made virtually no profit over the past 10 quarters.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="627348650" chart="line" title="Historical Profit Margins"]
Professor Galloway's observation of Amazon is that it must open stores as flexible, robust "warehouses" to sell their inventory. Amazon's strategy is as "the last mile, last man standing", where Amazon leverages its cheap access to capital to build a massive network of fulfillment centers throughout the world. However, Professor Galloway notes per research by Satish Jindel that Amazon spent $6.6bn on shipping costs, but only brought in $3.1bn for shipping charges, leaving net shipping costs of $3.5bn. With 2014 revenue of $88.98bn, net shipping costs were close to 4% of total revenue. Amazon has historically had profit margins for the past 10 quarters on a trailing twelve months basis on average of 0.1%. Without the necessity to ship products to consumers, profit margins for Amazon would be closer to 3%.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1908684967" chart="Bar" title="Amazon vs. Brick & Mortar"]
When comparing Amazon (a pure-play online retailer) to Wal-Mart, Costco, and Target (mixed e-commerce and brick and mortar stores) it is clear that Amazon's margins would be closer to the average of these three players, around 2.5%. Since companies like Wal-Mart and Best Buy optimize their in-store pick up options, you can receive your items faster and potentially cheaper than Amazon - without the burden of shipping costs. Items are either already in the store or the store distribution system can be leveraged for a very low marginal cost versus sending a package via USPS, UPS, FedEx, or other accelerated shipping company. This means, as brick and mortar stores make it easier to pick up your items from their store (curbside pickup, for example) it now makes sense to use the e-commerce/brick and mortar shopping option to receive both lower prices and to get your product faster. Alternatively, leveraging services like Uber, the delivery process can be further optimized from store to front-door. This is something Amazon may struggle to adapt to due to its focus on delivery services such as the USPS. Professor Galloway hypothesizes that Amazon must acquire a brick and mortar company in 2015, with the likely candidates being Radio Shack, a major gas station chain or even the U.S. Postal Service. Otherwise, Amazon's achilles heel, it's net shipping costs, leaves the company vulnerable - especially if its cheap access to capital erodes.
Professor Galloway discusses Facebook's grip on the App Economy, wherein Facebook properties dominate all age groups with their Facebook, Facebook Messenger, Instagram, and WhatsApp mobile apps. While Facebook on its own is a dominant force, it is the acquisitions Facebook has made with its access to cheap capital that has propelled the company to its dominant position. Instagram was a phenomenal acquisition, where Facebook paid $1bn to acquire the company and it is expected to generate $250-400 million in revenues in 2014 and has over 300 million users. The worst acquisition, according to Professor Galloway, was Yahoo's acquisition of Tumblr for $1.1bn, which is expected to have "material" revenues and only has 200 million users.
The biggest concern for Facebook in 2012 was their ability to transition from deriving their primary revenues from their desktop-based webapp to their mobile applications. We can see in fiscal year 2012 on the previous profit margin graph that Facebook's profit margins slid to around 1% before their mobile advertising strategy began to pay off. The acquisition of Instagram was a key driver of this success due to their emphasis on visual and mobile. Engagement rates are extremely high on Facebook properties and the company has a unique position to understand user identities both within its ecosystem, but also on other Facebook connected apps. This unique value proposition for advertisers and the successful transition from webapp to mobile app for their advertising platform has now cemented Facebook as one of the dominant Four Horsemen. Facebook currently has the highest profit margin of the Four Horseman at 23.58% for fiscal year 2014.
As mentioned previously, Google appears to be losing market share. This is evidenced by its declining revenue growth relative to the Four Horseman and its falling profit margins, as seen on the profit margin graph. Google's Return on Equity, a measure of value creation for it's stockholders, has been declining consistently for the past 10 quarters. Google is losing momentum across the board in search volume, engagement rates and video posts. Also, Google+ and Google Glass are now deemed to be busts with no clear commercialization opportunities.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1283756845" chart="line" title="Return on Equity"]
While Google still has a dominant advertising service (AdWords) and a dominant position as the primary operating system in mobile phones (Android), it has seen its momentum slow in the past few years. However, Professor Galloway did not mention Google's opportunities for the future of the company, which includes self-driving cars, multiple bets on "the Internet of Things", and increasing bets in the life sciences technology sector led by the extremely active Google Ventures. Google has a significantly higher R&D Expense to Revenue compared to Apple, and is also very high compared to Facebook, which has much lower revenues. Therefore, we can see that Google is investing in the future, and likely making much more bold and expansive bets on the future compared to any of the other Four Horseman. With the Google ecosystem maturing and losing momentum, Google needs to hit a grand slam with one of its Google X projects in order to remain a dominant force for the next 15 years.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1869291543" chart="line" title="R&D Expense to Revenue"]
Finally. We are to Apple. The glamorous King of the Four Horseman. Professor Galloway describes Apple's luxury brand competitive advantage based on its attention to craftsmanship, its iconic founder, its ability to achieve an exceptional price point, its complete vertical control of its value chain, its global reach, and its self-expressive benefit. It is these factors that allow Apple to continue dominating the other three horsemen. Professor Galloway focuses on the psychology that Apple has achieved that no other luxury or technology brand has ever achieved in modern history. He asserts that the luxury brand Apple has built implies that by owning an iPhone you are a better mate and are more capable of providing a prosperous future for offspring. He shows several graphs overlaying Apple iOS and Andriod on maps of New York City and Los Angeles to show that the higher income parts of the city use iOS. Apple products have become a modern day status symbol. This is extremely difficult for any company, especially a technology company, to achieve and is a major driver for why Professor Galloway believes Apple will be the first $1 trillion brand. Ironically (or not), the Intrinio intrinsic value (based on the default assumptions of Wall Street consensus growth and mean reversion margins) implies that Apple has an intrinsic value of just less than $1 trillion. As seen on the Return on Equity graph below, Apple has consistently achieved a higher Return on Equity for the past several years, illustrating its dominant position for creating value and its place as Professor Galloway's King of the Four Horseman.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="410508477" chart="line" title="Return on Equity - Last 6 Years"]
While presentations such the one delivered by Professor Galloway at the DLD15 Conference help us understand what top technology thinkers are forecasting as the future prospects of dominant companies like The Four Horesmen - there is no substitute for seeing the data for yourself and making your own conclusions. Professor Galloway has a whole team of researchers working with him to gather all the data points used in his analysis of the technology industry. We have made it extremely accessible to access all kinds of financial data and ratios for every publicly traded company in the United States. This means you can draw your own conclusions on industries and sectors including their investment prospects. In addition, we created a valuation engine to help you understand the intrinsic value of these companies, so you know you are buying a company with positive investment prospects at a great price. Many times great stories are already baked into the stock price, leaving little room for error in the execution of the company's plan. We help you see the whole picture so that you can make a well informed investment decision.
We have been hard at work over the past several months building the first investing community of its kind - a complete ecosystem for financial data and investment analysis. Intrinio features a robust and transparent Valuation WebApp, a comprehensive API with Excel Add-in, and a collaborative platform for discussing investment prospects.
While we still have much work to do, we are making our beta app available for testing and feedback. You have the opportunity to tell us exactly what you want us to build. This includes everything from views of certain data in the Webapp, to data sets delivered by the API/Excel Add-in, to companies you would like for us to cover.
We are in the process of writing documentation for everything, specifically the API and Excel Add-in, so in the mean time, please feel free to ask any questions in the Forum. We will do our best to respond within a few hours.
Thanks for the interest in Intrinio. We are very excited for what the next several months will bring.