Modern Value Investing Executive Education Program in London
September 7 - 9, 2022
The course starts with a review of the basic valuation framework, emphasizing its connection with the standard DCF approach. Ours is a sum of the parts approach in that we first value what the existing operations of the firm can generate on a sustainable basis. Then we value the growth component. As emphasized already, a proper assessment of growth in the modern corporation requires “redoing the financials” as the treatment of intangibles is excessively conservative when it comes to well-established firms such as Adobe or Meta. We need to have a thorough understanding of the assumptions underlying most accounting norms so that we can redo the financials tactically, across different cases subject to the peculiarities of each. The first module then establishes the conceptual underpinnings of the approach. It is demanding but it seeks to clarify and offer clarity and connections with other approaches such as the DCF approach. Importantly, and in order not to make for an excessively theoretical presentation, not all concepts and ideas are introduced in this first module. They are spread across the different modules and discussed in the context of specific examples.
The second module illustrates the framework in action, using Meta as an example. We use this example because, first, it is a well-known firm and thus the entry cost is low. Second, it is one of the FAANGs and has been a big driver of the market over the last decade. Third, it is engaged in a dramatic transformation of its business, from a social media platform supplier to a leading provider of virtual reality solutions. Fourth it is subject to regulatory disruption, both from state regulators as well as from platforms that carry the Facebook app, such as Apple. Fifth, it has suffered a dramatic drop in its stock price. It makes for a fascinating case.
The third module is devoted to the effect that technology has on the way firms supply products and services. Technology, in particular the advent of the cloud, changes the way firms offer services, requiring migration from one business model to another. The rise of the subscription economy is one of the great industry stories of the last fifteen years and we use the case of Adobe to illustrate this transformation. This is a particularly relevant case as this a transformation that is on-going, and for many years to come as it spreads to both across markets and sectors. The valuation of Adobe is a perfect illustration of the Modern Value approach.
We said above that a critical step is understanding the firm in the context of the industry and its dynamics. We illustrate this analysis in the case of the payments industry and use PayPal as an example of how a company that was a pioneer in the card-not-present on-line payment space is subject to disruptions not that dissimilar from the one that brought it to industry dominance in the first place. It is a complicated business one that requires a thorough understanding of the economics of payments. We thus start this module with a quick survey of the history of payments to understand how little and how much payments have changed. We then value PayPal.
In Module 5 we take a step back and consider the many shocks and trends that affect companies, with a special emphasis once again on the shocks that affect companies protected by barriers to entry. We cover one last example, that of Booking, which gives us the opportunity to study the economics of platforms and how they can be the source of powerful barriers to entry. We study the economics of pricing on two-sided platforms, a taste of which we would have acquired in our study of the payments industry. We focus on shocks in the context of existing trends and thus we look at the valuation of Booking during the first months of the pandemic.
Finally, we keep a case on deck, that of Salesforce, that further illustrates many of the issues brought forth by this course. It will be covered if time permits.