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HOW TO VALUE A COMPANY STOCK LIKE A JP MORGAN ANALYST - Coupang vs. Amazon vs. Alibaba vs. Sea - YouTube
Channel: rareliquid
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Have you ever wondered how professional
investors value a stock?
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Well today, I'm going to teach you all
about valuation. What's up everyone, my
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name is Ben. I'm a former J.P. Morgan
investment banking analyst and welcome
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to rareliquid the best channel for tech
investing
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Like I mentioned in my last video I'm
going to be using Coupang as an example
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for this valuation lesson
so if any of you guys are thinking about
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buying the company after its recent IPO
hopefully this is a helpful video for
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you but as always remember that I am not
a financial advisor so please treat all
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content
as entertainment purposes only and make
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sure to use it just as like a starting
point for your own research
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Alright with that said, let's get started
the first thing I want to do is go over
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a few key terms that you need to know
The first concept is enterprise value
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which equals your market cap + debt
+ non-controlling interest +
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preferred stock - cash
If most of these are totally new
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concepts to you,
don't worry. The main ones you really
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need to know are market cap, debt,
and cash because the other two are a bit
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abnormal but I'll leave a definition of
these in the comments below
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Equity value, which is also known as your
market cap, is pretty simple
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It's just your share price times your
number of shares
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Your debt and your cash are probably
self-explanatory
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if a company borrows money, then it has
debt. If it doesn't have zero debt and
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the company can also have a cash balance
But what may not be clear is the
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difference between enterprise value and
equity value,
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and I think the best way to really
explain this is through an analogy
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Imagine that you're driving you see a
beautiful house and you go up to it
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knock on the door and tell the person
who lives there and owns the house
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"Hey i want to buy your home." Let's say
the homeowner was looking to sell and he
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bought the house through a mortgage with
the local bank for one hundred thousand
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dollars
This one hundred thousand is the
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enterprise value. The homeowner says that
he has put in $30,000,
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which is the amount of equity
he put into the home and that's pretty
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much akin to
a company's market cap. This leaves the
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mortgage loan remaining on the home
of $70,000 and that's
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equal to a company's debt
Lastly you subtract out your cash when
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calculating your enterprise value
because basically a company could use it
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to pay off its debt
Now I'll be moving on to some of the
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other key terms I'll be using throughout
the rest of the video
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First there's Net Debt which is just
your debt minus your cash
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Second is LTM which stands for last 12
months
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Gross Margins is your gross profit
divided by your revenue
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Gross Profit is your revenue minus your
Cost of Goods Sold
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and lastly there's EBITDA which is your
operating income plus depreciation and
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amortization
and this is what many finance people use
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as a proxy for how much cash a company
is generating
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To go over all of these with an example,
imagine you have a t-shirt selling
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business and you sell
t-shirts for ten dollars each that cost
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two dollars to make and you're selling
ten of them
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This gives you a total revenue of one
hundred dollars
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your cost of goods sold is ten shirts
times two dollars so twenty dollars
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Your gross profit is one hundred dollars
minus twenty dollars which gives you
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eighty dollars
Your gross margin is eighty dollars
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divided by your revenue of one hundred
dollars which gives you 80%
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And let's say
operating expenses which include things
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like sales and marketing and wages to
employees
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costs sixty dollars, so your operating
income is eighty dollars minus sixty
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dollars,
which gives you twenty dollars and this
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is also known as your EBIT
Then let's say that you have ten dollars
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in depreciation expense,
and so your EBITDA is twenty dollars
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plus ten dollars, giving you
thirty dollars and thus your EBITDA
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Margin is 30%
Alright, now that you know the terms
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I'll be using, I'll show you now how to
value a company using Coupang as an
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example
But there are two things I want to
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mention beforehand and the first
is that there are multiple different
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ways to value a company and they range
in complexity
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The four main ones are the Discounted
Cash Flow analysis, Leveraged Buyout,
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Transaction comps, and Trading comps and
we're going to only be covering the last
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one
I decided to talk about trading comps
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because it's a really simple basic
fundamental analysis that anyone can do
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The second thing I want to mention is
that you can find all of the data I'm
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about to show you on financial data
aggregating sites like yahoo finance or
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wallmind.com
but it's important to note that a lot of
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times these websites are incorrect
so I actually had to manually go and
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change and fix
some of the numbers that you're going to
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see soon, by going into the company's
actual financial filings
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Okay so back to trading comps. Trading
comps is a relative valuation
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methodology in which you compare the
financial figures amongst a set of
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similar companies
to figure out what your target company
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is worth. The first step involves getting
a group of similar companies together
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which oftentimes can be the hardest part
because it really requires you to
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understand an industry
For our purposes you can see the list of
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companies I chose and will be comparing
against Coupang
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and all of these companies are pretty
big e-commerce players but
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many also have other divisions and these
companies are also located all over the
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world
This is actually one of the problems
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with trading comps. You'll never really
get an apples to apples comparison when
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you're
comparing companies because they differ
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so much in geography management teams,
different products that they sell,
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and so it's not really a perfect
analysis but it is one that really helps
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you figure out
and give one data point of what
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valuation your company should be at
The second step involves gathering
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financial information which
are all the ones I explained earlier on
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in the video the financial information
can completely differ so these aren't
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the ones that you have to have,
but they're just the ones I chose for
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the video but the one metric I didn't
explain
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earlier and honestly what the one that
is the most important are multiples
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which is on the very right over here
There are many different kinds of
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multiples but the one we're using today
is enterprise value divided by last 12
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months revenue
There are also ones like enterprise
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value over EBITDA and you've probably
also heard of PE multiples
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but basically what these numbers
represent are how many times
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investors are currently willing to pay
for every dollar of revenue earned in
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the last 12 months
for each company. So for Alibaba,
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investors are willing to pay six dollars
for every one dollar in revenue earned
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while for Sea, investors are willing to pay
nearly $26
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As you may have already deduced on your
own the higher the multiple,
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arguably the more expensive or
overvalued a company is,
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but of course there's a lot more to it
than that. When a company is trading at a
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really high multiple
usually it's a sign that investors
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really believe in the company and
believe that there's a lot of future
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growth ahead
and that the company will outperform. At
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the same time, there are times when
investors pile too much into one stock
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and valuation gets really stretched
and so that's when you want to stay away
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from a company that has a multiple that
you think is way too high
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Another thing I want to note is that
usually for trading comps you want to be
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always looking into the future, not the
past
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Right now we're looking at last 12 month
sales because looking into the future
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and getting consensus estimates
you have to pay a lot of money for that
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kind of information and frankly the
average investor like you and me just
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we don't have access to that information
The third step is to compare the
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financial figures against one another
and understand what's driving them and
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this is really where there are no
clear-cut answers
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So let's go through each of these
columns one by one. First off we have our
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market caps, and in an ideal world
you want to have companies that are
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around the same size as the company
you're valuing
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but most of the time that's not really
possible. In our case Coupang's market cap
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is 87 billion dollars
and so Amazon, Alibaba, and Samsung are
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way bigger than coupon so when I'm
looking at these numbers I'm mentally
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putting more weight
into the others on the list. In our next
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two columns, we have net
debt and enterprise value which I
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discussed earlier and what's important
to note here is that sometimes net debt
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makes a big difference like it does for
Alibaba
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but not so much for companies like
Mercado Libre
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In the next column we have revenue
growth and as you can see Coupang has the
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highest amongst all its peers besides Sea,
which is a great sign for Coupang. But at
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the same time you don't want to get too
carried away with the revenue growth
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because
the size of that company and their
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revenue really matters. When you're a
much smaller company it's much
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easier to grow faster just as how if you
had a friend who made
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100 million dollars from 50 million
dollars. That would be a lot more
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impressive than
if someone made one dollar from 50 cents
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One other thing i want to point out is
that Coupang generated nearly all its
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revenue from e-commerce and Coupang Eats
which is food delivery
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And last year Covid really boosted that
space and a lot of these companies
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received a similar boost but
some more than others and you just can't
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expect these kinds of growth rates
moving forward
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In these next columns are where things
get pretty interesting
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We see that coupon has the lowest gross
margins and EBITDA margins amongst its
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peers,
which is a bit concerning. What is
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especially concerning is that when a
company scales
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it should become more efficient and
Coupang is already generating more
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revenue than Sea
and MercadoLibre but has worse margins
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It's helpful to compare these numbers
because
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just by looking at them you can see that
you really need to dig into
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why Coupang's margins are so much lower
and what you can expect in the future
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Now we move on to the revenue multiples
to tie everything together and I'll go
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through a few examples to show you how I
would think about them
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Amazon earns 30 times more revenue than
Coupang and so it's crazy that the
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company grew at 38%
The company also has really solid
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margins, largely
and thanks to AWS and so a four-time
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sales multiple seems pretty
reasonable compared to the rest of the
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peers. Alibaba also has pretty
outstanding numbers and looks attractive
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and if it was a US-based company the
sales multiple would probably be a lot
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higher but
due to the risks in China that's
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probably why the stock has been hammered
lately. Sea
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and MercadoLibre are two pretty good
peers but they're based in Southeast
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Asia and Latin America respectively,
so totally different markets. But what's
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important to note here is that these
companies are trading at really really
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high multiples compared to Coupang
and to me even though their margins are
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higher I think the story is more about
the total
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addressable markets of these companies
rather than really the numbers you see
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here
Coupang right now is limited to the
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Korean market which has around 50
million people
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while Southeast Asia and Latin America
have well over 600 million people each
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Korea has one of the highest internet
and smartphone penetrations in the world
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while Southeast Asia and Latin America
technology in those areas
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penetration is still growing rapidly and
so investors may be justifying a high
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multiple by just saying
these markets are going to grow
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sustainably in the future while
for korea Coupang already has 15 million
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of the 50 million total
number of potential customers and so
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unless Coupang really
diversifies and enters into new markets
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the growth may be limited and that's why
you might see a lower multiple for
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Coupang
The last two I want to discuss are Naver
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and Kakao which are two Korean-based
companies
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These companies are trading at much
higher multiples than Coupang
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which may suggest that Coupang is trading
at an attractive value,
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but there is also a bit of a challenge
comparing
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these companies because they have higher
EBITDA margins and also trade on the
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korean stock market
while Coupang trades on the New York
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Stock Exchange. Still, I think that they
are good reference points and this leads
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me to the last step of trading comps
which is determining your implied
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valuation
I'll next be calculating what I think is
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a fair price for Coupang
But really quickly before I do if you
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guys want an excel spreadsheet
sent to you each week with a bunch of
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data for high growth stocks organized
for you,
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consider subscribing as a Gigabyte
Patron. I'll be upgrading this sheet over
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time and later on it'll include a
trading comps and DCF templates so you
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can run your own analyses
Anyway back to the topic at hand to
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calculate Coupang's implied share price
What i'm doing is multiplying my
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operational financial metric which in
this case is last 12 months revenue
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and multiplying it by the multiple that
i think the company should be trading at
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for me I'd be more comfortable to start
buying if Coupang traded in the range of
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four times to six times
which implies a share price of twenty
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eight dollars to forty two dollars
I would aim to start about twenty five
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percent of my position at six times
revenue if Coupang ever went down to
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forty two dollars
and dollar cost average down if the
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price keeps falling
My reasoning for four times to six times
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multiple is that Coupang really has a lot
of
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issue generating cash. Coupang's 11 billion
dollars is pretty impressive but you
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have to remember that they're pretty
much just helping merchants sell their
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items and they record that as
revenue versus companies like Kakao and
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Naver which
also have e-commerce divisions but also
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sell products that require things like
subscription
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and other services that are a little bit
hard to earn revenue but
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has a better, healthier margin. In
addition to this Coupang,
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as of now is currently limited to just
the korean market
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and so as an investor what I'd like to
see before justifying
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a higher multiple or the seven times
multiple it's trading at right
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now is some signs or execution that the
company is able to
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create a really cash generating business
like Amazon did with AWS,
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or that the company is able to
successfully execute in
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another country to pretty much just open
up and
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increase its total addressable market
Now with all this said as I did mention
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in my previous Coupang video
I am a customer myself and I think the
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company offers the best service
in all of the e-commerce competitors
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that are out here in Korea
and so I think that especially given
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that the company has been able to
already reach 15 million customers
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is probably going to reach more than 20
million in the coming years, there's just
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going to be so much opportunity for the
company
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at a huge scale like that to launch
different businesses
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and potentially dominate in the
different industries that they enter
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into
and so I'm willing to take the risk of
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entering at around a six times multiple
and if it drops even further than that
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I'll probably increase my position. I do
have to add that this is all a pretty
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simplistic analysis
and so if I wanted to get a better hold
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evaluation, I probably would want to run
a Discounted Cash Flow analysis on
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Coupang
if a video on discounted cash flow or if
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this video was helpful
please let me know in the comments below
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so I know to make more of these types of
videos
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With that said, that wraps up the video
as always thank you so much for watching
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hopefully I catch you in the next one
Thanks so much, peace out
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