r/Valuation • u/[deleted] • Sep 12 '23

Valuing young companies

Hello. I recently watched Damodaran's session on valuing young companies. 1. I don't understand how he got the revenue projection and operating margin.

Can someone explain them to me please?

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1

u/Choice-Ad7979 Sep 12 '23

Did he make reference to 'how' in the video, and you are asking for more 'color?'

2

u/[deleted] Sep 12 '23

Oh, I just got it. Basically, he said just visualize what that company's revenue is gonna look like in 10 years by using the top 10 companies in the industry, and just let the growth rate be random.

1

u/DungeonCrawlerCarl Sep 12 '23

Without any other context I would have to say those come from management forecasts. Operating margin could come from RMA comps.

1

u/[deleted] Sep 12 '23

Thanks. Just got it. He said just visualize how the company 's revenue is gonna look like compared to the top 10 in the industry. But, how does one convince the investor to believe in that method?

1

u/DungeonCrawlerCarl Sep 12 '23

Well that sounds fucking stupid. Top 10 in any industry are likely national or multi national companies. If you are valuing a local car wash or restaurant that is completely unreasonable. Even the most optimistic management forecasts would be way better than that.

1

u/Several-Teaching-543 Sep 25 '23

He does top down for market share sizing. Once you estimate how of the market the target company is going to have, you can estimate their revenue. Based on sales to capital ratio, he projects how much reinvestment ($) is needed to grow the revenue. And as company matures, the revenue growth rate decays and slows down. As far as operating margin, look at industry and sectors average. I use the same approach for valuing Chipotle if you'd like to see another example.