#+title: Section 11 | Lesson 59 - read financials and find data patterns #+HTML_HEAD: #+OPTIONS: H:6 * 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) EBIT=Gross Profit−Operating Expenses 3. calcuate taxes - assume taxes are 21% of EBIT Taxes=EBIT×21% 4. calculate net income Net Income=EBIT−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 \[ \text{Net Income} = \text{EBIT} - \text{Taxes} \] *** Stock Price - calculate the YOY trend for all the years you have stock price data \[ \text{YOY} = \text{SPnow} - \text{SPprev} / \text{SPprev} \] - forecast using the previous YOY and project what it will be going forward \[ \text{SPnow} = \text{SPprev} * \text{(1 + YOY)} \] *** Shares *note: we don't actually have this info* \[ \text{Share} = \text{Net Income} / \text{Diluted Earnings per share} \] ** valuation - 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 - assume the avg software company trades at 5x revenue in 5 years - MSFT, being a big company that grows slowly, grows at 70% of avg - so instead of trading 5x in 5 years, it will trade at 3x in 5 years - therefore the [[file:finance_terms.org::*Market Capitalization (Market Cap)][market cap]] should be $504bn in 5 years - market cap is $372 today, so this means 35% upside | | FY19e | FY20e | |---------+----------+-------------| | revenue | $128,530 | $143,953 | |---------+----------+-------------| | | | $503,835.69 | | | | 36% | ok, first thing is first. he claims the following 1. market cap is 372b today 2a. a company would normally be trading at 5x in 5 years 2b. in this case it will be 3x in 5 years bc it is a large company 3a. |-|FY12|FY13|FY14|FY15e|FYo