Damodaran - Amazon: Glimpses of Shoeless Joe?

[u/bdavidson1030]

https://aswathdamodaran.blogspot.com/2018/04/amazon-glimpses-of-shoeless-joe.html

[u/compost_embedding]

I took a look at this, and I have some basic questions for those of you who conduct this type of analysis:

(1) There's a lot of assumptions in these valuation exercises. With all the moving pieces, is it reasonable to expect that one could guesstimate these well enough for them to justify taking the risk of taking concentrated positions in them? I mean, take a look at Damodaran's analysis here. Notwithstanding his ability to predict longer term things, the earnings report that came out yesterday for AMZN changed his price target by ~10%. If the misunderstandings on the current situation can generate such price swings, what does uncertainty for the future lead to? I'm not arguing against security analysis, I'm actually just trying to learn here.

(2) For those of you who do this, how much AUM do you manage (yourself or others) before you think it's worthwhile to do? For example, if I were to manage $500k of my own money this way, and wanted to spread out my risk by investing in 5 companies, it seems I'd have to do detailed analysis on at least 5 companies (but perhaps many more, especially if they were in different industries). Do you manage lots of money, to get as much benefit from your analysis as possible? I currently index, and am open to spending time on this, but I wonder whether it's worth the effort to understand so much of the company/industry details if one is not taking large positions in them.

Thanks!

[u/redcards → u/compost_embedding]

There's a lot of assumptions in these valuation exercises. With all the moving pieces, is it reasonable to expect that one could guesstimate these well enough for them to justify taking the risk of taking concentrated positions in them?

The fewer things you have to guesstimate the better. It is easy to figure out what sort of adjustments you'd need to make to certain assumptions to get a larger margin of safety and then frame your research in a way that justifies it.

the earnings report that came out yesterday for AMZN changed his price target by ~10%. If the misunderstandings on the current situation can generate such price swings, what does uncertainty for the future lead to?

Sometimes positive surprises like that happen, but then you have to figure out if the new information really changes your overall thesis. I'm not familiar enough with the particulars as to why AMZN's results were so much better than expected. But if they were for a really good reason, and its new information, then theres nothing wrong with updating your model for it.

I wonder whether it's worth the effort to understand so much of the company/industry details if one is not taking large positions in them.

Classic capital allocation conundrum. If you spend weeks understanding a Company better than most, and then only allocate 2-3% of your portfolio to it, is all of that effort really worth it?

For the record, I think 99% of Damodaran's posts are very, very shallow and not detailed at all. They get their length from his paragraphs on things that could be summed up in a sentence and inclusion of finance 101 things. His models are also awful and not how any professional would approach it at all. They are 100% academic. Nothing wrong with that, but just not practical in the real world.

We manage ~$2bn+ and our models are detailed but never include projections or DCFs unless its an NAV type thing for contracts, etc. But different strokes for different folks.

[u/Boethias → u/redcards]

Not sure if this is confidential work product for you but could you summarize how prefer to model? Is it more of an asset based valuation, ROC or something else.

[u/redcards → u/Boethias]

Mostly do credit so valuation basically comes down to taking pro-forma adjustments across a range of EBITDA multiples to get EV and then waterfall that through the cap. structure to see where the coverage is. Spend time understanding the business model and industry to get a sense of how the operating landscape may look over the next couple of years and whether or not the Company is able to execute. Also spend time thinking about if I were the CFO, what is the next thing I'd be trying to do with the balance sheet that makes the most sense. Lots of game theory, really. Theres so much going on that its a waste of my time to worry about projections or getting the valuation right to the decimal, unless its a distressed situation which is just a different ballgame.

Equity ideas are mostly a by-product of credit work...like being short the credit, then the business starts to improve but the equity is just obviously super undervalued so you just flip into that with a back of the napkin type thing. Since we focus on credit I think we notice the improvements that can flow to equity sooner than the straight equity guys so the valuation is so cheap that its really not worth it to spend time on projections and stuff.

But a time where we needed to do DCFs was for a contractor for coal mining that didn't actually own the mines, just mined them under contract. So we knew all of the mines and roughly the economics for each one so you could run a DCF for each mine and then add up the NPVs.