#+title: Section 11 | Lesson 59 - read financials and find data patterns
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* Links
- [[./../mba-main.org][TOC | Business]]
- [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4315028#overview][S11:L59 course video]]
- file:../_data/section_11/microsoft_valuation.numbers
- file:../_data/section_11/course_notes.pdf

* Notes

- MS changed from a growth stock to a value stock
- growth investors loved it
- bill gates left and the company became a bureacracy
- dont ever invest in a tech company where the founder is gone
- they are buying back shares

** forecast revenue
- forecast each year after the next
  - not looking at each
- add assumptions 'why' something will happen
  - e.g. 2016 Windows 10 is free for the first year, but the second year cost
  - xbox sales slowing
    - good because factories are less profitable
  - the new director was good with clouds and clouds are good for $

*** how to build the model
- read the 10k
- go to investors website and read relations stuff
- last 15 minutes of conference wall street guys ask questions
- call investor relations directly and ask them
  - make sure you do your due dilligence
  - the relations guys will bs you if you don't know your stuff
- you have the same access as analysts do
  - reg fd: regulation federal disclosure
    - government mandatated
    - everyone has the same access
      - publish on website
      - publish on webcasts

** calculate net income
1. calculate operating expenses
   \[
   \text{Operating Expenses} = \text{R&D} + \text{Sales & Marketing} + \text{G&A}
   \]

2. calculate operating income (EBIT)
   \[
   \text{EBIT} = \text{Gross Profit} − \text{Operating Expenses}
   \]

3. calcuate taxes (assume taxes are 21% of EBIT)
     \[
     \text{Taxes}= \text{EBIT} × \text{21%}
     \]

4. calculate net income
   \[
   \text{Net Income} = \text{EBIT} − \text{Taxes}
   \]

** calculate forecasted fields
*** Operating Expenses
   \[
   \text{Operating Expenses} = \text{R&D} + \text{Sales & Marketing} + \text{G&A}
   \]

*** Operating Income (EBIT)
   \[
   \text{EBIT} = \text{Gross Profit} - \text{Operating Expenses}
   \]

*** Taxes
   - Assume taxes are 21% of EBIT
     \[
     \text{Taxes} = \text{EBIT} \times 21\%
     \]

*** Net Income
   \[
   \text{Net Income} = \text{EBIT} - \text{Taxes}
   \]

*** Shares

**** Where We Have the Information
- When historical data is available, derive share count using net income and diluted EPS:
   \[
   \text{Shares} = \frac{\text{Net Income}}{\text{Diluted EPS}}
   \]

- For forward projections, we reverse this: project shares first, then derive EPS.

**** Assumed Share Growth by Company Type

| Company Type              | Assumed Annual Share Growth      |
|---------------------------+----------------------------------|
| High-growth tech          | 5–8%                             |
| Mid-sized growth firm     | 3–5%                             |
| Blue chip or cash-stable  | 0–2% or flat/shrinking via buybacks |

**** Core Financial Projection Assumptions

| Element     | Assumption                                                       |
|-------------+------------------------------------------------------------------|
| Shares      | Project using a realistic dilution rate (e.g., 3–5%) unless buybacks occur |
| Net Income  | Calculate as EBIT × (1 - tax rate), based on revenue projections |
| EPS         | Net Income / Shares                                              |


*** EPS
- For projected years, calculate EPS based on projected net income and projected shares.
- Maintain a YOY column for EPS to support stock price modeling.

*** Stock Price

- Stock price should be projected based on fundamentals, not simple historical price growth.
- Use a mix of valuation models (outlined below) to estimate target price.
- These models are based on earnings, revenue, and comparable multiples.


** valuation of stock price
- create a forecast
  - got earnings per share
  - listed assumptions

*** how to make a target price
- 3 methodologies
- do all of them and take an average
- keep it simple

**** methodology 1: price vs earnings per share

***** NOTE: we are calculating STOCK PRICE based on EARNINGS PER SHARE multiplied by YOY GROWTH RATE

***** Understanding "Valuation" - Price/Earnings (P/E) Ratio Methodology

This section of your financial course explains how to estimate the target price of a stock five years into the future using the Price-to-Earnings (P/E) ratio.

***** 1. The Price-to-Earnings (P/E) Ratio
- The **P/E ratio** is a way to value a stock based on its **earnings per share (EPS)**.
- It is defined as:

  #+BEGIN_SRC
  P/E = Stock Price / Earnings Per Share (EPS)
  #+END_SRC

- Stocks typically trade at a P/E ratio that is close to their **earnings growth rate**:
  - If a company's **earnings grow at 20% per year**, it will likely have a **P/E ratio of ~20x**.
  - If earnings **grow at 8% per year**, the stock might trade at **8x EPS**.

***** 2. Forecasting the Target Price (5-Year Estimate)
- The **target price** in **5 years** is based on the company’s **forecasted EPS** multiplied by a reasonable P/E ratio.
- In this example:
  - **MSFT’s EPS is growing at 12% per year**.
  - The stock should trade at a **P/E of 12x** in 5 years.

***** 3. Using the Provided Table (EPS Forecasts)

| Metric                         | FY19e  | FY20e  |
|---------------------------------|--------|--------|
| Diluted Earnings Per Share (EPS) | $3.93  | $4.90  |
| Year-over-Year EPS Growth       | 12%    | -      |

- **FY19e EPS = $3.93**
- **FY20e EPS = $4.90**
- **EPS is growing at 12% per year**.

***** 4. Calculating the Target Price
- Since the company is growing at **12% per year**, we assume it will trade at **12x earnings** in 5 years.
- Using the **FY20e EPS of $4.90**:

  #+BEGIN_SRC
  Target Price = 12 × 4.90 = 59
  #+END_SRC

***** 5. Comparing Today’s Price to the Target Price
- **Assume MSFT is trading at $47 today** (when the course was written).
- **Expected appreciation in 5 years**:

  #+BEGIN_SRC
  (59 - 47) / 47 = 25% increase
  #+END_SRC

- Since **MSFT is a mature company**, a **25% increase in 5 years seems reasonable**.

***** Final Takeaways
✔ The P/E ratio method values stocks based on **earnings growth**.
✔ Stocks usually trade at a **P/E close to their earnings growth rate**.
✔ Target price is found by **multiplying the estimated EPS by the assumed P/E ratio**.
✔ **MSFT, trading at $47 today, could reach $59 in 5 years with 12% EPS growth.**

🚀 Now you understand how the course uses P/E ratios for stock valuation!



**** methodology 2: price vs revenue/sales
***** useful for
- high growth companies with little or no earnings
- early-stage firms
- SaaS and tech companies

***** forumula
   \[
   \text{Target Share Price} = \text{Projected Revenue Per Share} + \text{Target P/S Multiple}
   \]

   \[
   \text{Target Share Price} = \frac{\text{Projected Revenue}}{\text{Shares Outstanding}} \times \text{P/S Multiple}
   \]

***** step by step
1. calculate basics
   - projected revenue
   - number of shares at that time
2. choose a target P/S multiple
   - depends on
     - industry averages
     - historical P/S range for the company
     - growth rate (higher growth -> higher justified multiple)

3.  divide the revenue by the shares and multiply by P/S mulitiple

  #+BEGIN_SRC
  share price = (revenue / shares) * P/S Multiple
  #+END_SRC
