Dec

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Growth, from Denis Vako

December 3, 2007 |

DamodaranAswath Damodaran says 90% of finance is about PV (essentially DCF), and 95% of DCF is about estimating discount rate. Can we conclude, thus, that 80+% of DCF finance is about estimation of discount rate? Nope, he actually thinks that estimation of growth rate is much more important than estimation of discount rate — and that is the same premise Vic and Laurel initially lead me to, as I read their books a long time ago.

Since it is ultimately about true growth, which is now expected to be rare, therefore especially valuable, one can argue that the current growth industries of the market are: aerospace/defense, diversified and healthcare/medical. What other parts of the market could be growthful?

Henrik Andersson adds:

I remember a couple of years ago when this finance professor did a valuation of Google and said it was worth no more than $100 or similar. The stock was then at maybe $200 and is now around $700.  Not easy. even for someone like Damodaran, to estimate fair value…

Alex Forshaw suggests:

Are you thinking of John Hussman?

June 13, 2005:

Which brings us to Google. Initially, I estimated Google to be worth about $24 a share. It has since enjoyed some very good operating surprises. I'd currently estimate its value somewhere in the $30's.

No zero is missing in that last sentence, though the quickest way for the company to substantially enhance its intrinsic value would be to buy everything it possibly can with its own overvalued currency.

Google has been doing exactly what Hussman prescribed, even as Hussman's forecast/analysis could not have been farther off.

Hussman continues:

To paraphrase Grantham, if Google is worth $300 a share, capitalism is broken.


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  1. Barry Gitarts on December 4, 2007 6:48 pm

    A big impact is also the perpetuity assumption. Once you have the growth rate for the next 3-5 years, what do you use for growth to level off to after that? If one assumes 0% growth from year 3 on, or 3% (isn’t it safe to assume a company can grow it earnings at the historical rate of inflation?) It will make a huge impact on the valuation.

    If you do valuations for most companies using 0% growth from year 3, you will notice that most are trading near fair value, if you use 3% you will notice most are undervalued. So it seems like market is expecting most companies growth to significantly decline over the next few years.

    Of course what this really may demonstrate, is that the market overall is undervalued.

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