1999
Aswath Damodaran
ABSTRACT
In traditional valuation models, we begin by forecasting earnings and cash flows and discount these cash flows
back at an appropriate discount rate to arrive at the value of a firm or asset. This task is simpler when valuing
firms with positive earnings, a long history of performance and a large number of comparable firms. In this paper,
we look at valuation when one or more of these conditions does not hold. We begin by looking ways of dealing with
firms with negative earnings, and note that the process will vary depending upon the reasons for the losses. In
the second part of the paper, we look at how to value young firms, often a year or two from start-up, with negative
earnings, small or negligible revenues and few comparables. We will argue that while estimation of cash flows and
discount rates is more difficult for these firms, the fundamentals of valuation
continue to apply. Finally, we look at how best to do relative valuation for young firms with negative earnings
and few comparables.
The valuation of Amazon.com presented in this paper was done in December 1998, when the stock was trading at $300 per share. Shortly thereafter, the firm announced a three-for-one stock split. To compare the valuation to current prices, therefore, the per-share value reported in the paper for Amazon has to be adjusted (divided by three). You can download the spreadsheet with the entire valuation from this site: Amazon.xls.
Damodaran: (212) 998-0349 adamodar@stern.nyu.edu
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