6.3 KiB
Section 11 | Lesson 59 - read financials and find data patterns
- Links
- Notes
- forecast revenue
- calculate net income
- calculate forecasted fields
- valuation
- how to make a target price
- 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
- 1. The Price-to-Earnings (P/E) Ratio
- 2. Forecasting the Target Price (5-Year Estimate)
- 3. Using the Provided Table (EPS Forecasts)
- 4. Calculating the Target Price
- 5. Comparing Today’s Price to the Target Price
- Final Takeaways
- methodology 2: price vs revenue/sales
- methodology 1: price vs earnings per share
- how to make a target price
Links
- TOC | Business
- 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
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forecast each year after the next
- not looking at each
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add assumptions 'why' something will happen
- e.g. 2016 Windows 10 is free for the first year, but the second year cost
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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
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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
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you have the same access as analysts do
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reg fd: regulation federal disclosure
- government mandatated
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everyone has the same access
- publish on website
- publish on webcasts
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calculate net income
- calculate operating expenses \text{Operating Expenses} = \text{R&D} + \text{Sales & Marketing} + \text{G&A}
- calculate operating income (EBIT) EBIT=Gross Profit−Operating Expenses
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calcuate taxes
- assume taxes are 21% of EBIT Taxes=EBIT×21%
- 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
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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).
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It is defined as:
P/E = Stock Price / Earnings Per Share (EPS) -
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.
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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.
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Using the FY20e EPS of $4.90:
Target Price = 12 × 4.90 = 59
5. Comparing Today’s Price to the Target Price
- Assume MSFT is trading at $47 today (when the course was written).
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Expected appreciation in 5 years:
(59 - 47) / 47 = 25% increase - 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
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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
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therefore the market cap should be $504bn in 5 years
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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
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- 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.