The Dark Side of Valuation: Valuing Old Tech, New Tech and New Economy

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9780130406521: The Dark Side of Valuation: Valuing Old Tech, New Tech and New Economy

It has been a brave new world for investors, since the explosion of dot.coms onto the scene. What is their worth? How do you assess them as an investor? How do you apply traditional investment analysis to valueing them and what new analysis tools do you need? And what about companies that blend the old and new economies? How do you assess them as well? These are the frontiers on Valuation.

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If the tech-stock swoon merely whets your appetite for this roller coaster of a market sector, and your eyes don't glaze over at the very sight of formulas such as "Return on Capital = EBIT (1 - t) / Capital Invested", then The Dark Side of Valuation is the investment guide you've been waiting for. Whether considering New Economy firms at their peak or their valley, suggests Aswath Damodaran, the problem has always been determining their true value with equitable dispassion. A leading expert on the topic, Damodaran begins by noting that standard corporate valuations are determined by four factors: cash flow from existing investments, growth expected from this cash flow, length of time this growth is sustained, and cost of capital to sustain it. In what he admits is not always an easy read, Damodaran then details various ways to adapt conventional valuation methods for companies that lack key traditional variables (such as profits, track records, and even competitors with which they can be compared) in order to arrive at realistic valuations. Those not scared off by charts comparing the historical risk for T-bills and T-bonds since 1928 will find this book worth a look. -- Howard Rothman

From the Back Cover:

  • The comprehensive guide to valuing technology companies
  • Projections for future revenues, earnings, cash flows, the impact of stock options, and more
  • 5 detailed case studies cover the entire tech lifecycle: Amazon.com, Ariba, Cisco, Motorola, and a new IPO
  • Presented by one of the world's leading experts in valuation
  • State-of-the-art tools for assessing the value of any technology company

Technology companies have exploded in importance, yet investors and analysts face unprecedented challenges in valuing them. In The Dark Side of Valuation, one of the world's leading valuation experts reviews every approach, demonstrating exactly how to adapt traditional techniques to minimize risks and maximize returns.

Aswath Damodaran begins with an overview of the markets' dramatic shift towards technology stocks — specifically new technology stocks. He then identifies key valuation principles and techniques, demonstrating them through five case studies that encompass the entire technology company lifecycle: Amazon.com, Ariba, Cisco, Motorola, and a new IPO-ready startup. Coverage includes:

  • Adaptation of discounted cash flow models for tech companies with limited histories, shifting business mixes, and volatile stock prices
  • The limitations of traditional accounting definitions in measuring technology company cash flows
  • Superior processes for estimating future revenues, earnings, and cash flows
  • Evaluation of the impact of management and employee stock options on share value and earnings multiples
  • An in-depth assessment of PEG and price-to sale ratios
  • Relative valuation: fundamentals, earnings multiples, and revenue multiples
"What a refreshing book to read! Damodaran's book is essential if capital markets are going to accurately gauge the contributions of emerging companies...His insights are illuminating and his mastery of financial analysis is unmatched."

—Louis Columbus
Director of Marketing, Linksys

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