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How to Miss By a Mile: And as you would expect, his answer is critically dependent on these two assumptions. As the Series A investor and board member at Uber, I was quite intrigued when I heard that there was a FiveThirtyEight article specifically focused on the company.
I have always loved the deep, structured analysis that Bill Simmons and Grantland bring to sports, and when Nate Silver also joined ESPN, I was looking forward to the same thoughtful analysis applied to a much broader range of subjects.
I could hardly wait to dive in and see the approach. Young math students are warned about the critical difference between precision and accuracy.
Financial models, especially valuation models, are interesting in that they can be particularly precise.
Applied Corporate Finance: A User's Manual (Wiley Frontiers in Finance) by Aswath Damodaran and a great selection of similar Used, New and Collectible Books available now at initiativeblog.com May 18, · Overview There are as many models for valuing stocks and businesses as there are analysts doing valuations. The differences across these models are often emphasized and the common elements are generally ignored. 3 Valuing companies early in the life cycle is difficult, partly because of the absence of operating history and partly because most young firms do not make it through.
A discounted cash flow model can Aswath damodaran to a result with two numbers right of the decimal for price-per-share.
But what is the true accuracy of most of these financial models? So here is the objective of this post. It is not my aim to specifically convince anyone that Uber is worth any specific valuation.
I am also not out Aswath damodaran prove him wrong. I am much more interested in the subject of critical reasoning and predictions, and how certain assumptions can lead to gravely different outcomes.
And I hope the analysis is judged on whether the arguments I make are reasonable and feasible. Damodaran uses two primary assumptions that drive the core of his analysis.
He then guesses at a market share limit for Uber — basically a maximum in terms of market share the company could potentially achieve. The rest of his model is rather straightforward and typical. In my view, there is a critical error in both of these two core assumptions. There are multiple reasons why this is a flawed assumption.
When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past.
Consider the following example from 34 years ago that included the exact same type of prediction error: Bythe number of subscribers worldwide had surpassed 5 Billion and cellular communication had become an unprecedented technological revolution.
We will now walk through those key differences, dive deep on the issue of price, and then consider a range of expanded use cases for Uber, including one that changes the game entirely. A Radically Different Experience Pick-up times. In cities where Uber has high liquidity, you have average pick-up times of less than five minutes.
For most of America, prior to Uber it was impossible to predict how long it would take for a taxi to show up. As Uber becomes more established in a market, pick-up times continue to fall, and the product continues to improve. As Uber evolves in a city, the geographic area they serve grows and grows.
Uber initially worked well primarily within the San Francisco city limits. It now has high liquidity from South San Jose to Napa. This enlarged coverage area not only increases the number of potential customers, but it also increases the potential use-cases.
Uber is already achieving liquidity in geographic regions where consumers rarely order taxis, which is explicitly market expanding. With Uber you never need cash to affect a transaction. The service relies solely on payment enabled through a smartphone application.
This makes it much easier to use on the spur of the moment.
It also removes a time consuming and unnecessary step from the previous process. This is well documented and understood. With taxis, users worry about being taken advantage of, and many drivers spend all day with riders accusing them of such.
This can make for an uncomfortable experience on both sides. Most Uber riders believe they are safer in an Uber than in a traditional taxi.Aswath Damodaran! 3! Three approaches to valuation!
Intrinsic valuation: The value of an asset is a function of its fundamentals – cash ﬂows, growth and risk. In general, discounted cash ﬂow models are used to estimate intrinsic value.! 8 days ago · Part three of our Amazon miniseries takes a bearish turn as Professor Aswath Damodaran rejoins Behind the Idea to talk about his short position.
"Aswath Damodaran is simply the best valuation teacher around. Ifyou are interested in the theory or practice of valuation, youshould have Damodaran on Valuation on your bookshelf/5(6). Prof Aswath Damodaran, Stern School of Business, NYU; S Naren, CIO, ICICI Prudential AMC and Chakri Lokapriya, CIO & MD, TCG AMC debate the trade-off between numbers and narratives in a discussion with Ajaya Sharma of ETNow.
Excerpts How important is . Aswath Damodaran. Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. Numbers are nothing without a story, and a story needs numbers to back it up. So says New York University finance professor Aswath Damodaran in this illuminating guide to valuing companies.