WEBVTT - Ritholtz's Masters in Business: Aswath Damodaran Interview 0:00:00.120 --> 0:00:03.159 Brought to you by Bank of America. Merrill Lynch seeing 0:00:03.160 --> 0:00:06.120 what others have seen, but uncovering what others may not. 0:00:06.559 --> 0:00:10.280 Global Research that helps you harness disruption. Voted top global 0:00:10.320 --> 0:00:13.880 research firm five years running. Merrill Lynch, Pierce, Fenner and 0:00:13.920 --> 0:00:21.440 Smith Incorporated. This is Masters in Business with Barry Ridholds 0:00:21.640 --> 0:00:25.560 on Bloomberg Radio. This week on the podcast, we have 0:00:25.920 --> 0:00:31.640 n y u sterns Aswath Dama Doren. He is a 0:00:31.640 --> 0:00:37.240 professor at n y U Stern and specializes in valuation 0:00:37.600 --> 0:00:42.760 and let me spend a moment or two just explaining 0:00:42.800 --> 0:00:46.040 exactly what that means. Whenever you make a purchase, be 0:00:46.120 --> 0:00:50.040 it a private, non publicly traded company, it could be 0:00:50.040 --> 0:00:54.080 private equity, it could be venture capital, or a public company, 0:00:54.200 --> 0:00:56.920 or a hedge fond or a mutual fund or anything 0:00:57.000 --> 0:01:00.520 like that, or a market or an index, you are 0:01:00.640 --> 0:01:05.920 making a valuation decision. You are basically saying this company 0:01:06.080 --> 0:01:09.240 is worth paying this much money for because I expect 0:01:09.240 --> 0:01:12.679 there to be gains in the future, and there are 0:01:12.680 --> 0:01:15.000 a few people in the world who are better at 0:01:15.080 --> 0:01:19.679 making that assessment than than our guest. Um. I'll leave 0:01:19.720 --> 0:01:23.880 out all the specific details of his curriculum VITAE. It's 0:01:23.920 --> 0:01:27.600 too long to list. I need. All I need really 0:01:27.600 --> 0:01:31.160 need to say is he's a rock star professor um. 0:01:31.200 --> 0:01:37.800 Incredibly insightful, eloquent, intelligent, uh sort of guy, really really 0:01:37.880 --> 0:01:42.800 interesting conversation. I this was one of those interviews where 0:01:43.920 --> 0:01:46.640 I expected it to be good and I was delighted 0:01:46.760 --> 0:01:50.440 with how absolutely fascinating the guests was. So with no 0:01:50.520 --> 0:01:55.440 further ado, my conversation with n y U S. Aswath Damadharin. 0:01:58.800 --> 0:02:03.120 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:02:03.640 --> 0:02:06.400 My special guest today is n y U S Professor 0:02:06.520 --> 0:02:11.880 Aswath Demodrin. He is the Kirshner Family Chair in Finance 0:02:12.000 --> 0:02:15.399 Education at the n y U Stern School of Business. 0:02:15.560 --> 0:02:18.800 I'm only going to give you an abbreviated version of 0:02:18.840 --> 0:02:21.800 his curriculum vita. Otherwise we'll take up the full hour. 0:02:22.360 --> 0:02:25.240 A b. S. At Madras University and MS from the 0:02:25.280 --> 0:02:29.840 Indian Institute of Management N B A. And PhD from 0:02:29.880 --> 0:02:34.000 the University of California at Los Angeles. He is the 0:02:34.040 --> 0:02:38.760 recipient of too many fellowships and awards for teaching excellence 0:02:38.800 --> 0:02:41.880 to to note other than to point out he is 0:02:41.960 --> 0:02:44.920 the five time winner of the Professor of the Year 0:02:45.480 --> 0:02:48.480 at n y U. He is also the author of 0:02:48.600 --> 0:02:54.760 several highly regarded academic texts on corporate finance, valuation, and 0:02:54.840 --> 0:02:58.240 investment management. He's written so many books. Let me just 0:02:58.560 --> 0:03:03.360 reference a few, The Little of Stock Valuation, investment valuation 0:03:03.440 --> 0:03:09.000 tools and techniques, corporate finance theory and practice, investment philosophies, 0:03:09.040 --> 0:03:12.600 successful strategies, and the investors who made them work, and 0:03:12.800 --> 0:03:17.200 on and on us with Delmaradin. Welcome to Bloomberg. Thank you, 0:03:16.919 --> 0:03:19.799 I'm glad to be here. I'm I'm excited to have 0:03:19.880 --> 0:03:22.840 you because this is an area that is so important 0:03:22.880 --> 0:03:26.720 to investors and we really don't dive as deeply into 0:03:26.800 --> 0:03:30.960 it as we probably should. So so let's just start 0:03:31.160 --> 0:03:35.440 right from the beginning. Where should investors be thinking when 0:03:35.440 --> 0:03:39.400 they look at the question of valuation. I think the 0:03:39.480 --> 0:03:42.160 first thing investors have to be asking is whether they 0:03:42.160 --> 0:03:45.360 should be doing evaluation in the first place, because valuation 0:03:45.440 --> 0:03:48.800 requires two things. One is it requires a willingness to 0:03:48.880 --> 0:03:52.960 learn the basic tools. And many investors want to do valuation, 0:03:52.960 --> 0:03:54.880 but they don't want to learn about accounting. They want 0:03:54.880 --> 0:03:56.640 to do evaluation, but they don't want to learn about 0:03:56.680 --> 0:03:59.119 present value. They want to do valuation, but they don't 0:03:59.120 --> 0:04:02.000 want to understand the basics that drive risk and return. 0:04:02.640 --> 0:04:05.680 And that's lazy. It's lazy, and it leads to you 0:04:05.800 --> 0:04:08.400 spending a lot of time thinking your value companies and 0:04:08.440 --> 0:04:11.360 you walk away with actually nothing to show for it. 0:04:11.960 --> 0:04:13.480 So the first question I would ask you is do 0:04:13.520 --> 0:04:16.080 you have time to be willing to do things you 0:04:16.160 --> 0:04:19.400 might not enjoy doing learning those twos? What is the 0:04:19.440 --> 0:04:22.560 alternative to not learning to do just put your money 0:04:22.600 --> 0:04:24.720 in an index. Fun in the world would be far 0:04:24.760 --> 0:04:26.360 better off if you just put your money in the 0:04:26.360 --> 0:04:27.919 next one, went back to doing what you did with 0:04:27.960 --> 0:04:30.200 the rest of your life. Be a doctor, be an engineer, 0:04:30.320 --> 0:04:33.400 be a plumber, do what you do in your regular life. 0:04:33.440 --> 0:04:35.560 You investing for what it's meant to do, which is 0:04:35.600 --> 0:04:38.920 to preserve and grow what you save from your job. 0:04:39.720 --> 0:04:41.560 And I think for a lot And that's the other 0:04:41.600 --> 0:04:43.640 point it emphasized, because a lot of people invest for 0:04:43.680 --> 0:04:45.760 the wrong reason. They want to get rich. I mean 0:04:45.800 --> 0:04:48.440 that's the reality. We invest because we want to beat 0:04:48.480 --> 0:04:50.880 the market. It's a lottery ticket. We're gonna We're gonna 0:04:50.880 --> 0:04:53.200 find the next to Apple, the next Google, and I 0:04:53.240 --> 0:04:55.760 think in the process we make mistakes, and then we 0:04:55.800 --> 0:04:57.960 beat ourselves up about the mistakes we make, and that 0:04:58.080 --> 0:05:02.240 leads to more mistakes. Sounds fairly like a familiar story. 0:05:02.680 --> 0:05:06.520 So so let's talk about the accounting work. I assume 0:05:07.000 --> 0:05:11.040 you're talking about looking at account statements, looking at balance sheets, 0:05:11.080 --> 0:05:15.120 looking at cash flows. How does the average investor wrap 0:05:15.160 --> 0:05:17.039 their head around. I would say keep it simple, because 0:05:17.080 --> 0:05:19.400 I think if you take an accounting class, the problem 0:05:19.400 --> 0:05:21.760 is an accounting class is all about debit and credit 0:05:21.960 --> 0:05:24.560 and getting you into the nitty gritty of the footnotes. 0:05:25.279 --> 0:05:27.960 I actually did an exercise where I do these webcasts 0:05:27.960 --> 0:05:30.240 where I actually took the propran gamble ten K, and 0:05:30.279 --> 0:05:32.159 what I did was I did a webcast where I 0:05:32.160 --> 0:05:34.680 talked about how little of the ten K is actually 0:05:34.760 --> 0:05:37.599 useful in valuation and how much of it is noise. 0:05:38.480 --> 0:05:42.040 Accountants throw in small stuff with the big stuffy. They're 0:05:42.040 --> 0:05:44.760 incapable of telling the difference the stuff that maddens the 0:05:44.800 --> 0:05:47.880 stuff that doesn't because there accountants the detail oriented, they've 0:05:47.920 --> 0:05:50.240 focused on it. I was about to say, not only 0:05:50.320 --> 0:05:53.120 the detail oriented, but when it comes to a ten K, 0:05:53.800 --> 0:05:56.960 the typical responses, hey disclose it all better to get 0:05:57.000 --> 0:05:59.760 it out than be accused of hiding something later. In fact, 0:05:59.760 --> 0:06:02.280 that the point I make is data is not information. 0:06:02.360 --> 0:06:04.719 We're mistaking the two. We have a lot more data 0:06:04.760 --> 0:06:06.920 than we used to have thirty five years ago. Typical 0:06:06.960 --> 0:06:09.680 ten K now is five times longer than it used 0:06:09.720 --> 0:06:12.520 to be thirty years ago. Really, that's fascinating because of 0:06:12.520 --> 0:06:15.080 all the disclosure requirements. And that's part of the problem 0:06:15.120 --> 0:06:17.200 is people think that if you throw everything into a 0:06:17.240 --> 0:06:20.719 ten K, you are being more informative. I actually suggest 0:06:20.760 --> 0:06:23.239 that maybe we should go back to fifteen page ten ks, 0:06:23.279 --> 0:06:25.919 where you focus on the things that really matter, like 0:06:25.960 --> 0:06:28.479 a nutrition statement on the side of the canda soda. 0:06:29.000 --> 0:06:31.640 Here's the important metrics that you need to know. I'll 0:06:31.640 --> 0:06:34.279 give you an example of a completely useless section of 0:06:34.320 --> 0:06:36.359 a ten K where they describe the risks that they 0:06:36.440 --> 0:06:40.640 might face, like twenty pages. It's exactly it's a lawyer 0:06:40.680 --> 0:06:42.880 writing that stuff. Right in case we get suited. We 0:06:42.960 --> 0:06:45.480 told you competition could come in and take the market, 0:06:45.480 --> 0:06:48.159 as if you didn't know that when you invested. So 0:06:48.400 --> 0:06:50.640 I would actually argue that we're moving in the wrong 0:06:50.720 --> 0:06:54.440 direction by pushing more and more disclosure requirements When In fact, 0:06:54.520 --> 0:06:57.560 we need more focus in financial statements, better and more 0:06:57.600 --> 0:07:00.680 focused exactly releases as opposed to just to your volume. 0:07:00.720 --> 0:07:03.080 In fact, I do a fifteen minute webcast and exactly 0:07:03.200 --> 0:07:05.240 the accounting. I need you to know things like do 0:07:05.320 --> 0:07:07.960 you know the difference between gross income operating income in 0:07:08.040 --> 0:07:11.440 net income? If you don't, you're in trouble, right, So 0:07:11.560 --> 0:07:14.200 the basic stuff so that once you can, it's more 0:07:14.520 --> 0:07:17.760 financial statement analysis and accounting that I want you to know. 0:07:18.160 --> 0:07:21.400 Can you read a statement of cash flows? That's that's 0:07:21.480 --> 0:07:25.360 quite quite interesting. So when we talk about non cash 0:07:25.480 --> 0:07:31.080 charges and amorization and appreciation and goodwill and all these 0:07:31.120 --> 0:07:35.080 fun geeky terms, are these of any assistance to the 0:07:35.120 --> 0:07:38.040 average investor? Most of them are not. I'll tell you 0:07:38.800 --> 0:07:41.840 I've described good will as the most destructive accounting item 0:07:41.920 --> 0:07:45.120 ever created in history. So let's let's delve into that. 0:07:45.280 --> 0:07:48.520 Define goodwill for people who may not be familiar with 0:07:48.560 --> 0:07:51.200 the phrase goodwill is the accountant admitting he screwed up. 0:07:51.320 --> 0:07:52.920 Because that's the way to think about it. Right. So 0:07:52.920 --> 0:07:54.440 if you have a company with the four billion dollar 0:07:54.480 --> 0:07:56.640 book bellion, I pay ten billion the accounting, there's a 0:07:56.720 --> 0:07:59.280 six billion dollar problem to explain away, so he shows 0:07:59.320 --> 0:08:03.440 it as good will. So it's very squishy, it's very elastic. 0:08:03.480 --> 0:08:05.880 You could put whatever you want into that. It's it's 0:08:05.920 --> 0:08:08.680 a plug variable. You put it in because your balance 0:08:08.680 --> 0:08:11.200 sheet has to balance. It is a very unpleasant requirement. 0:08:11.600 --> 0:08:14.360 So good will exist for one reason alone. It balances 0:08:14.440 --> 0:08:17.160 balance sheets. It's a plug variable. In fact, I send 0:08:17.160 --> 0:08:20.560 these suggestions to I F R S and to GAP 0:08:20.600 --> 0:08:22.120 that they never seem to take. And one of the 0:08:22.120 --> 0:08:25.480 suggestions I've sent a few years ago was, let's rename 0:08:25.560 --> 0:08:28.000 goodwill as an algebra when you have a missing barriable 0:08:28.040 --> 0:08:31.600 to make X, because then we wouldn't do crazy things 0:08:31.640 --> 0:08:35.640 like paying for goodwill. I'm Barry Ridlts. You're listening to 0:08:35.880 --> 0:08:39.440 Masters in Business on Bloomberg Radio. My guest today is 0:08:39.480 --> 0:08:44.360 Professor as Damadarn of n y U Stern School of Business. 0:08:44.440 --> 0:08:49.600 He is an expert in the valuation of corporations. Let's 0:08:49.640 --> 0:08:53.440 talk about two of the hottest companies out there, both 0:08:53.440 --> 0:08:58.520 of which seem to have a somewhat ambiguous valuation, Tesla 0:08:58.679 --> 0:09:01.920 and Amazon. So let's let's talk about Tesla. You've done 0:09:01.960 --> 0:09:06.320 so much work on that. What is the bottom line 0:09:06.400 --> 0:09:10.199 with the valuation of Tesla. I mean, with all young companies, 0:09:10.240 --> 0:09:12.480 it's a story that you tell about the company that 0:09:12.600 --> 0:09:17.600 drives your evaluation. The narrative, and with Tesla, the narrative 0:09:17.760 --> 0:09:20.480 can lead you to different places. I mean, I'll give 0:09:20.520 --> 0:09:22.920 you I'll give you an example. When I first valued 0:09:22.960 --> 0:09:25.120 Tesla was about three years ago. I value them as 0:09:25.160 --> 0:09:28.480 a luxury automobile company. I gave them the margins of 0:09:28.559 --> 0:09:31.360 luxury automobile companies, and I gave them the growth you 0:09:31.400 --> 0:09:33.199 can get as a luxury automobile company. Came up with 0:09:33.240 --> 0:09:36.599 about a hundred dollars per share. Okay, the problem with 0:09:36.679 --> 0:09:39.640 Tesla is you've got, for lack of a better word, 0:09:39.640 --> 0:09:43.440 a delusional CEO who kind of keeps expanding the story 0:09:43.520 --> 0:09:45.640 on you. Right because in a sense, today he's an 0:09:45.679 --> 0:09:48.240 automobile company. Tomorrow is a clean energy company. They have 0:09:48.320 --> 0:09:51.480 tomorrow god only knows where. So the story for Tesla 0:09:51.679 --> 0:09:54.480 I call it the ultimate story stock, which is people 0:09:54.520 --> 0:09:57.000 have stopped talking about numbers. The numbers really, and that's 0:09:57.000 --> 0:10:00.240 why Tesla stock price can take all this punish mint 0:10:00.280 --> 0:10:03.040 of deliveries not being on time. It's still hang in 0:10:03.040 --> 0:10:05.520 there because the people who invest in Tesla have bought 0:10:05.600 --> 0:10:11.160 into Elon Musk's story. Is there an Elon Musk premium? 0:10:11.200 --> 0:10:15.800 I think there's an Elon Musk fandom, which essentially Tesla 0:10:15.880 --> 0:10:19.280 investors are not investors like other companies. They don't invest 0:10:19.320 --> 0:10:21.800 in the company for the earnings that cash flows. They're 0:10:21.800 --> 0:10:25.640 not worried about delivery schedules not being met. They're buying 0:10:25.720 --> 0:10:28.480 the Elon Musk story. So there was There was just 0:10:28.600 --> 0:10:32.360 an article out the other day, that Bloomberg release that showed, 0:10:33.200 --> 0:10:41.200 amongst luxury automakers BMW, Audie, Mercedes and others plus Tesla 0:10:42.080 --> 0:10:45.920 in terms of sheer volume last quarter, Tesla's beating everybody. 0:10:45.960 --> 0:10:48.160 And is that a fair statement? And I think Tesla 0:10:48.160 --> 0:10:50.960 has some incredible strengths, which is I mean, can you 0:10:50.960 --> 0:10:53.800 imagine another automobile company telling the world that they're going 0:10:53.880 --> 0:10:55.520 to come out with a new model in two thousand 0:10:55.600 --> 0:10:58.199 and eighteen and four hundred thousand people signing up today 0:10:58.200 --> 0:11:01.079 and putting down insane It's nobody else will do it. 0:11:01.160 --> 0:11:03.600 So how about just the idea of someone saying, I 0:11:03.640 --> 0:11:06.560 have an idea, let's make a new automobile company that 0:11:06.640 --> 0:11:09.680 has hasn't been done? And how many And that's why 0:11:09.920 --> 0:11:12.440 I feel frustrated with Tesla because at the core, it 0:11:12.559 --> 0:11:15.959 has something very powerful, this connection to customers, that no 0:11:16.040 --> 0:11:19.560 other automobile company does. And the reason I'm frustrated is 0:11:19.600 --> 0:11:23.400 I want them to build this incredible, great automobile company. 0:11:23.440 --> 0:11:26.000 I want focus here. Instead, what do I get? I 0:11:26.040 --> 0:11:28.199 get them acquiring Solar City and telling me that they're 0:11:28.200 --> 0:11:32.440 building battery panels and solar power. Well, you're gonna buy 0:11:32.440 --> 0:11:35.160 a battery pack, put in your garage, put the solar 0:11:35.160 --> 0:11:38.479 cells on your roof, and now we've made you completely 0:11:38.520 --> 0:11:41.760 independent off the grid. Look what we've done for you 0:11:41.800 --> 0:11:45.680 as an automobile purchaser. And in a sense, I think, 0:11:45.720 --> 0:11:48.400 once you've established yourself as an automobile company, maybe you 0:11:48.440 --> 0:11:50.199 want to do this, But already you have enough on 0:11:50.280 --> 0:11:52.240 your plate. Why would you want to load up more 0:11:52.360 --> 0:11:55.920 stuff on your plate? Especially because I think Solar City 0:11:56.160 --> 0:11:59.280 is a commodity in a commodity business with a huge 0:11:59.280 --> 0:12:01.720 amount of dead So it's almost like you're adding three 0:12:01.760 --> 0:12:05.800 distractions to a company that already has so much to 0:12:05.880 --> 0:12:08.960 focus on. If I were Testla, I'd looking at getting 0:12:08.960 --> 0:12:11.760 the Tesla three delivered on time, because that's going to 0:12:11.840 --> 0:12:14.440 be disastrous. If you've got four hundred thousand people expecting 0:12:14.480 --> 0:12:16.560 the car to be delivered in two thousand and eighteen, 0:12:16.920 --> 0:12:19.840 and that doesn't get and this is this is the 0:12:19.920 --> 0:12:25.400 low cost under forty dollars exactly every person all electric automobile, 0:12:26.000 --> 0:12:30.120 which ironically General Motors um turns out to be ahead 0:12:30.120 --> 0:12:32.920 of Tesla with Chevy with their their first they had 0:12:32.960 --> 0:12:35.559 the vaults and now they have the vaults, They're actually 0:12:35.559 --> 0:12:38.559 gonna beat Tesla the market. Yeah, but I think Tesla 0:12:38.600 --> 0:12:41.920 will win that game simply because General Motors wants to 0:12:41.920 --> 0:12:44.480 go after the fifteen maybe the lowest. I mean a 0:12:44.559 --> 0:12:48.680 Tesla will never be a fully mass market automobile company 0:12:48.840 --> 0:12:51.760 because I think in a sense they will always trade 0:12:51.760 --> 0:12:54.800 at a premium over a GM car. So I think 0:12:54.840 --> 0:12:57.280 they will have that price premium and a profit margin. 0:12:57.679 --> 0:13:01.480 But all of that presupposes that they make the trains 0:13:01.559 --> 0:13:04.560 run on time. I could talk about Tesla all day. 0:13:04.960 --> 0:13:09.120 Will come back to that. Let's talk about Amazon. I 0:13:09.160 --> 0:13:13.840 mentioned there was a uh euron Musk premium. Is there 0:13:13.880 --> 0:13:17.400 a Jeff Bezos premium at Amazon? And I think it's deserved. 0:13:17.440 --> 0:13:19.679 I mean, Amazon has been one of my pet obsessions 0:13:19.679 --> 0:13:21.880 for twenty years. It's a company that I valued first 0:13:21.880 --> 0:13:25.080 in seven and I valued pretty much every year since. 0:13:25.440 --> 0:13:27.679 I tell people I bought Amazon four times and I've 0:13:27.679 --> 0:13:29.760 sold Amazon four times, which kind of tells you where 0:13:29.760 --> 0:13:31.800 I am with Amazon, Right. Have you regretted all of 0:13:31.800 --> 0:13:34.280 those cells? No, because I think in a sense, I 0:13:34.280 --> 0:13:36.439 I have to stay true to my faith, which is 0:13:36.480 --> 0:13:39.040 I buy companies because I think, like an investor, the 0:13:39.080 --> 0:13:41.679 price has to be less than the value. Amazon is 0:13:41.679 --> 0:13:43.600 a company where the price can take off and go 0:13:43.760 --> 0:13:47.240 well ahead of value for extended stretches for years. And 0:13:47.280 --> 0:13:49.440 I think part of the reason I think people are 0:13:49.480 --> 0:13:52.040 willing to pay a premium is I've never seen a 0:13:52.080 --> 0:13:55.600 company where a CEO has been more consistent about his narrative. 0:13:55.600 --> 0:13:58.600 In fact, he's the the anti Elon Musk. Right. If 0:13:58.600 --> 0:14:00.920 you go back to and then you read the letter 0:14:00.960 --> 0:14:03.400 that Amazon said to I don't know whether you've ever 0:14:03.440 --> 0:14:06.000 read that Jeff Bezos. There's a great letter that's online 0:14:06.120 --> 0:14:09.040 on what he told people he would do as a company, 0:14:09.400 --> 0:14:12.600 and he's done it, and he's stayed exactly true to 0:14:12.640 --> 0:14:16.040 the script. There have been a handful of pivots, but 0:14:16.200 --> 0:14:20.640 he's pretty much been fairly consist Their minor shifts, of course, 0:14:20.920 --> 0:14:24.600 course changes, not wholesale reversals in any ways. In the fact, 0:14:24.680 --> 0:14:27.320 I describe Amazon as a field of dreams company, right, 0:14:27.320 --> 0:14:31.400 which is if we is what the story he told is, 0:14:31.960 --> 0:14:34.200 if we build it, they will come. Basically said, we're 0:14:34.200 --> 0:14:36.480 gonna go after revenues first, We're not going to worry 0:14:36.520 --> 0:14:40.360 about profits, and once we build the revenues, the profits 0:14:40.400 --> 0:14:42.560 will come. And he stayed true not just to that 0:14:42.640 --> 0:14:44.720 story in terms of what he said, but how he acts. 0:14:45.080 --> 0:14:47.560 You look at the Kindle, you look at it basically 0:14:47.600 --> 0:14:50.320 go product by product. So yeah, let's go through. You 0:14:50.360 --> 0:14:54.360 have the Kindle, you have the Amazon Fires, Amazon Tia, 0:14:54.600 --> 0:14:59.240 Amazon Prime. Right. Basically, Amazon Prime is I started Amazon 0:14:59.280 --> 0:15:01.080 Prime a few years years ago. I was late to 0:15:01.120 --> 0:15:05.440 the party, and it's just become indispensable. Amazon Music, Amazon Video, 0:15:05.440 --> 0:15:08.400 and what they share in common is Amazon sells every 0:15:08.400 --> 0:15:11.080 one of those products at cost or below. They're open 0:15:11.120 --> 0:15:14.040 about it. Amazon Prime they charge you go to the 0:15:14.160 --> 0:15:16.200 ten K, they actually tell you how much it was. 0:15:19.000 --> 0:15:21.440 They give you the cost or how much it costs 0:15:21.480 --> 0:15:24.840 them to service. It's about three. Basically they're saying, look, 0:15:24.840 --> 0:15:28.080 why's subsidizing it, But they say it's okay because if 0:15:28.080 --> 0:15:31.400 we build it, they'll come. Your colleague, an n y 0:15:31.480 --> 0:15:35.640 U professor Galloway, has been suggesting Amazon should go out 0:15:35.680 --> 0:15:38.680 and buy the US Postal Service. Of course, they're shipping 0:15:38.720 --> 0:15:41.920 costs are now in the billions, soon to be tens 0:15:41.920 --> 0:15:44.320 of billions of dollars, and you know whatever our FedEx 0:15:44.360 --> 0:15:48.080 and UPS. I'd be terrified where where Amazon is going next? Right, 0:15:48.320 --> 0:15:52.280 because Amazon has this insane capacity to destroy almost every 0:15:52.440 --> 0:15:55.160 business for everybody else in the business. Now it's done 0:15:55.200 --> 0:15:57.960 in the retail business already. The reason I will I 0:15:58.000 --> 0:16:01.560 will be hesitant to buy Netflix X is because Amazon 0:16:01.720 --> 0:16:04.920 is entering big time into that business. Ups and FedEx. 0:16:04.960 --> 0:16:06.920 You look at Amazon entering the business because here's what 0:16:06.960 --> 0:16:09.320 Amazon does with every business they go into. They sell 0:16:09.440 --> 0:16:13.040 below cost, They challenge you to match up with them, 0:16:13.080 --> 0:16:16.520 and they can keep going long after you dropped out 0:16:16.520 --> 0:16:19.760 of the game. So I think that Scot's right. I mean, 0:16:19.800 --> 0:16:22.400 I think that there is change coming to this business. 0:16:22.440 --> 0:16:25.800 I'm Barry Ridhults. You're listening to Masters in Business on 0:16:25.840 --> 0:16:30.480 Bloomberg Radio. My guest today is Aswath Damadarn. He is 0:16:30.520 --> 0:16:34.440 a professor of finance at n y u's Stern School 0:16:34.440 --> 0:16:37.840 of Business. He is also an author of numerous books, 0:16:37.880 --> 0:16:44.800 including the Little Book Evaluation and Investment Philosophies, Successful Strategies 0:16:45.080 --> 0:16:48.800 and the investors who made them work well. We were 0:16:48.840 --> 0:16:53.640 previously talking about Tesla and Amazon, and but these are 0:16:53.640 --> 0:16:58.080 public companies and the market gives us an approximate valuation 0:16:58.240 --> 0:17:01.480 every day. Let's talk a little bit about private companies 0:17:01.520 --> 0:17:05.239 where there isn't that public valuation. How do you go 0:17:05.320 --> 0:17:10.840 about valuing a non traded private company. I think knowing 0:17:10.920 --> 0:17:13.000 the prices a crutch, right, I mean, in a sense 0:17:13.000 --> 0:17:15.359 you value should not be a function of knowing the price. 0:17:15.440 --> 0:17:18.080 We use it in public companies often as a feedback 0:17:18.119 --> 0:17:20.600 loop to make sure we aren't screwing up too badly. 0:17:21.119 --> 0:17:22.879 So it's true when you value a private business you 0:17:22.880 --> 0:17:25.800 look for that crutch. It's not dead, though it depends 0:17:25.800 --> 0:17:28.479 on the private business. I valued over multiple times on 0:17:28.520 --> 0:17:30.960 my blog. And there there is a pricing. It's a 0:17:31.040 --> 0:17:35.120 VC pricing or a Saudi Sovereign Fund pricing of the company. 0:17:35.200 --> 0:17:37.560 But is that a true pricing. I've I've heard people 0:17:37.640 --> 0:17:42.040 make that argument. But what you're essentially doing is instead 0:17:42.040 --> 0:17:46.960 of taking the collective wisdom of millions of investors. However, misguarded. 0:17:47.000 --> 0:17:49.679 They may be at times you're lying on one person 0:17:49.800 --> 0:17:53.160 rinning a check and that valuation. In fact, this is statistical. 0:17:53.200 --> 0:17:55.600 It's a statistical problem. In the regular market, you have 0:17:55.680 --> 0:17:58.000 hundreds and hundreds of people trying to assess the price 0:17:58.040 --> 0:18:00.600 your one person. So all you need is one crazy person. 0:18:00.600 --> 0:18:02.800 In fact, I wrote an article on VC pricing just 0:18:02.840 --> 0:18:06.000 a couple of weeks ago on how VC pricing can 0:18:06.119 --> 0:18:08.480 very quickly get out of control because all you need 0:18:08.520 --> 0:18:11.800 is one crazy person to drive the pricing process out 0:18:11.800 --> 0:18:15.119 of control. It's a feedback feedback, it's a feedback loops. 0:18:15.160 --> 0:18:17.920 So but it's so that's that's part of the problem. 0:18:17.960 --> 0:18:20.120 The other part is when a VC says I've got 0:18:20.160 --> 0:18:22.320 five percent of a company and I paid fifty million, 0:18:22.400 --> 0:18:26.640 you can't extrapolate that simply because vcs, when they invest 0:18:26.680 --> 0:18:29.320 in the equity and a company often get these options 0:18:29.320 --> 0:18:31.880 on the side right roundside protect so it's much more 0:18:32.000 --> 0:18:34.840 so it's a much sweeter deal than exactly. So it's 0:18:34.840 --> 0:18:38.359 a much more difficult place to get a price, but 0:18:38.440 --> 0:18:40.040 at least you have a price. I think it gets 0:18:40.119 --> 0:18:42.840 really tough if you ask me to value the hot 0:18:42.840 --> 0:18:46.160 dog stand outside right, because I can value it. There 0:18:46.280 --> 0:18:49.280 is no price I can compare it to, and it 0:18:49.359 --> 0:18:52.640 makes me uncomfortable. It makes everybody uncomfortable not to have 0:18:52.720 --> 0:18:55.200 something check, and that I think is a psychological problem 0:18:55.200 --> 0:18:57.920 with valuing private businesses. You value the business, say, how 0:18:57.960 --> 0:19:01.800 do I know I'm even within the ballpark? Right? You're stuck, 0:19:02.080 --> 0:19:04.960 stuck relying on the metrics that exactly that you use 0:19:05.560 --> 0:19:08.040 um And to make sure people understand, when you talk 0:19:08.080 --> 0:19:13.360 about options, vcs very often have the right to reinvest 0:19:14.040 --> 0:19:18.920 in a subsequent round at a same or discounted price 0:19:18.960 --> 0:19:21.960 to whatever that next valuation is. When you say options, 0:19:21.960 --> 0:19:25.040 it's not actually options, it's it's so they're getting this 0:19:25.320 --> 0:19:29.080 upside advantage. You also get a downside protection sometimes, which 0:19:29.119 --> 0:19:33.280 is the value decreases. They are allowed ways of escaping 0:19:33.320 --> 0:19:37.200 from that. So vcs are pretty careful about putting those 0:19:37.200 --> 0:19:39.840 options in, and founders go along because it allows them 0:19:39.880 --> 0:19:42.639 them to inflate that because I'm sure because when the 0:19:42.720 --> 0:19:45.480 journalist says, you know, so such in the Terranniss valued 0:19:45.480 --> 0:19:48.520 at nine billion, they're often extrapolating from a VC investment. 0:19:48.560 --> 0:19:50.679 So it serves the founder and the vcs to at 0:19:50.720 --> 0:19:54.480 least put out the surface number that everybody is buying into. 0:19:54.680 --> 0:19:57.800 So you mentioned Taranis, which was widely known as a 0:19:57.920 --> 0:20:01.160 unicorn before the nar would have turned out to be 0:20:01.280 --> 0:20:04.400 pretty much nonsense. And now the whole thing is sort 0:20:04.440 --> 0:20:08.880 of mid collapse. We're watching it doing enron Um not 0:20:09.000 --> 0:20:13.280 quite the same underlying issues as Enron had. But when 0:20:13.359 --> 0:20:17.240 when the business school case is written on that, it's 0:20:17.240 --> 0:20:20.639 going to be really interesting to see how people missed 0:20:20.640 --> 0:20:23.120 all the warning signs. What about some of the other 0:20:23.200 --> 0:20:28.320 Silicon Valley unicorns, the billion dollar private companies. You mentioned Uber? 0:20:28.960 --> 0:20:31.920 What is uberworth? Well, according to the pricing, it's worth 0:20:31.920 --> 0:20:34.800 over sixty billion. What do you think it's worth. I 0:20:34.840 --> 0:20:39.760 think it's worth a number, and well it's my estimate 0:20:39.800 --> 0:20:41.840 of the value. I'm not sure what the legit number 0:20:41.960 --> 0:20:44.520 is because Uber is very I think the part of 0:20:44.520 --> 0:20:46.479 the problem with Uber is we know what it can do. 0:20:46.640 --> 0:20:50.320 It can grow revenues like crazy. It's in kind. I 0:20:50.359 --> 0:20:52.960 go to cities where you would not think Uber would 0:20:52.960 --> 0:20:55.119 be there, but it's there, such as give me a few. 0:20:55.480 --> 0:20:59.919 I was in Moscow's Apolo, Jakarta and Delhi last summer. 0:21:00.160 --> 0:21:02.480 Every single city, I asked the audience, how many of 0:21:02.560 --> 0:21:06.800 you got your Uber and in every single city. To 0:21:06.880 --> 0:21:09.240 the people in the in the session said they came 0:21:09.280 --> 0:21:13.399 in by Uber. That's astonishing. They're that widespread. That's the 0:21:13.440 --> 0:21:16.560 good news that they know how to grow because they 0:21:16.560 --> 0:21:18.679 have a very low capital intensity model. To grow in 0:21:18.680 --> 0:21:20.239 the city, all they need to do is hire a guy, 0:21:20.280 --> 0:21:22.080 put them in a motel room, ask them to get 0:21:22.119 --> 0:21:24.800 some drivers together. Because they don't own the cars, they 0:21:24.800 --> 0:21:27.480 don't have the driver, they don't the drivers don't work 0:21:27.480 --> 0:21:29.720 for them. The problem for Ruber is they have a 0:21:29.760 --> 0:21:32.640 business model which is indefensible. What I mean by that 0:21:33.000 --> 0:21:35.240 is they can grow revenues, but they can't make money 0:21:35.960 --> 0:21:39.680 right because entry is easy. So that what was happening. 0:21:39.720 --> 0:21:42.120 What's happening in the U S and it's concerning every 0:21:42.160 --> 0:21:45.200 right sharing company is Lift offers Uber drivers two thousand 0:21:45.240 --> 0:21:50.119 dollars to switch to lift. Uber offers Lift and to 0:21:50.200 --> 0:21:53.120