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Valuing Young Growth Companies

by Aswath Damodaran

In May 2011, LinkedIn (LNKD), a social media company that allows individuals to create professional and business networks, went public to great fanfare, with the stock price doubling on the offering date.

While Linkedin reported only $20 million in operating income on revenues of $243 million in 2010, the market capitalization of the firm was $10 billion on the date of the initial public offering (IPO). The reaction from investors and analysts fell along predictable lines. Value investors and fundamentalists argued that the market capitalization was absurd, pointing to the sky-high price-earnings ratio (in excess of 1,000). In reaction, investors who were bullish about the company countered that traditional valuation metrics and approaches don’t work for young growth companies.

Both groups are wrong. The traditional value investing approaches tend to attach too much weight to existing assets (and earnings), whereas the growth and momentum investors are making a mistake in abandoning valuation principles.

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Aswath Damodaran holds the Kerschner Family Chair in Finance Education and is professor of finance at New York University Stern School of Business.


Discussion

Don from Nevada posted over 2 years ago:

Any back testing results?


William from South Carolina posted over 2 years ago:

It would be great if AAII offered it's members the opportunity to plug in a stock and have the system analyze the stock based on a predetermined criteria.

Maybe this benefit exist and I don't know it.


Edmund from Florida posted over 2 years ago:

I think that could be done by your investment experts. And the basis of the evaluations must be published for each analysis


Bill from Florida posted over 2 years ago:

Prof. Damodavan's MBA course at NYU is available free online at: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr10.htm


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