BLUF: £20 a share
I have taken a look at Damodaran’s re-valuation for Telsa, the electric vehicle manufacturer. Perhaps unsurprisingly, he found it to be overvalued. I had a look for card on the Tesla website, and they retail at 50 grand a pop. To be honest, I think that’s all the fundamental analysis you need! I’ll be sticking to my Volksy. Thanks.
But I digress. The point is that Tesla is a fast-growth speculative company, for which he provides a spreadsheet (see his post for a link). It shows that you can value even highly uncertain companies if you try. Although people might argue, with a point that I can concede, that you might think you can value them, but that valuation is illusory.
Undaunted, I thought I’d have a pop at valuing ASC (ASOS) by adapting his spreadsheet. I was quite excited by the prospect, so my adaption was very slapdash, and hence probably wrong. Feel free to point out mistakes; but let’s not get into a flamefest here. The valuation should be considered fun only, and off-the-cuff. Valuations are highly sensitive assumptions, different people will have different assumptions, rightly or wrongly, which will affect the valuations they obtain. Got that?
Analysts have been throwing around lots of target prices lately, and I wonder to what extent the price targets are created with a view to the price action of the market, rather than an independent assessment of the cash flows. My “tl;dr” (Too Long, Didn’t Read) valuation of ASC was £20 a share, compared with the recent price of £51.23, suggesting that ASC is way overvalued. I have shared my spreadsheet, in case you want to look over the details and change the model to suit your liking. I’m not entirely sure that I’m using the right model, so that’s something I need to perform an additional check on.
I expect that everybody is going to hate my valuation. The bulls will undoubtedly say that I am being too conservative in my projections, and therefore undervaluing the shares. The value investors will think I am still suffering some kind of after-effects of anchoring bias or drinking some momentum Kool-Aid, as that would still put ASC on a PE of 35.
Let’s visit some key assumptions that go into the valuation. The first is that the revenue growth rate will be 25% pa for the next 5 years. Is that reasonable? Well, over the last decade, the growth in revenues has been a monstrous 68%pa. That has cooled to a still impressive 57% over the last five years. The growth rate is going down, but some people may think I have throttled the growth too much. That’s entirely possible, but you must remember that ASC is now a much bigger company, where growth will be difficult to scale. Analysts are also expecting revenues to growth from 1015 for 2014 to 1247 for 2015, a growth rate of “only” 23%. I then have revenues tapering off to the risk-free rate (2.95%) over years 6 to 10, which I also use in the terminal year. Revenues will have increased a little over five-fold in a decade if this scenario plays out – no mean feat for any company, and would give it revenues higher than NXT (Next) has right now. BTW, where the spreadsheet is expressed in dollars, it is really in pounds sterling. Don’t let that point confuse you.
ASC actually has surprisingly small EBIT margins, at 6.91%, and I have them tapering down to 5% over 10 years. We should expect plenty of competition from the likes of boohoo and such, just itching to take a slice of those high returns on capital.
I’ve made some assumptions on tax rates, which look innocuous enough to me.
A big assumption I have made is in the company’s sales to capital ratio, at 6.36. I have based it on the recent financials I’ve seen. This is impressive in the extreme, and people may be suspicious that it is too good to be true. Anyway, that’s the figure I’ve used. It is a number which will impact the valuation significantly.
Those are the big issues out of the way. There’s a number of smaller issues. I calculated the cost of capital rather quickly, and just used the beta from Digital Look. I should highlight that I am doing a firm valuation, rather than an equity valuation. So the beta I would get from Digital Look would be an equity beta to be used for calculating cost of equity, which I would then need to adjust with a cost of borrowing to obtain a cost of capital. Fortunately, there’s not much in the way of debt for ASC, so I have simplified my work by saying assuming that firm free cashflows are the same are equity. If you think I’ve made an egregious assumption there, then perhaps someone would like to show the calculations as to how it should be recomputed. I suspect that it is no biggie. I have the cost of captial tapering off after 5 years. This is fair, because the company should get less risky as it matures further, and hence justifies a lower cost of capital.
I have properly adjusted from a firm valuation to an equity valuation by taking into account cash. Again, this is no biggie, as cash is about 4% of the total value of the entrerprise.
I haven’t looked into options, and assumed that I’m looking at a fully-diluted basis. That may well be an incorrect assumption, but I’d have to dig through the accounts to check what’s going on on that score.
I don’t think there’s much else in the way of assumptions or controversy there. I’ve laid out the big ones for you.
Just my 2 cents. Enjoy
Update 27-Aug-2014: added BLUF at top of post for quick reference. Corrected link to valuation spreadsheet.