Aswath Damodaran - The Value of a User

[Music] good morning and welcome back this is a real treat for us in our industry there are average professors we have a every school has a lot of those that were the bomb on tasbeeh rules in 1978 and are still here and then there are good professors are great professors and then there's a SWAT team Motorin who kind of sets the bar not only here at the business school but across graduate education and it's consistently named one of the best professors in the world here at the Stern School we have a hundred and ninety faculty members and each year the students select one professor who they feel is most inspiring in the classroom Sonya Marciano who you heard from yesterday has done something that's really unusual she's won twice that's what the Motorin has won nine times which for those of you who understand statistics is impossible so that's why it's literally written the book on valuation and it's probably one of the dozen people in the world that can actually move markets so when it goes on television or in front of media and makes a comment about a specific stock the stock responds anyways for that professor to Motoring I am lucky and over unlucky enough to teach almost every single class that I teach in this room this is I last semester I was counting and I've taught 1380 minute sessions in this room and I'd love to tell you I like this room I absolutely detest this room it's got the ambiance of a Madison Square Garden on the day the Knicks are losing by 20 points okay which is almost every single time they play so it's a it's not a great room so I hope you are able to kind of stay in your seat at least for the next whatever amount of time you're sitting here but 30min to me is like the time I get to get warmed up so I should probably get started otherwise I'll just keep wandering so what I'd like to talk a little bit about today is the value of a user let me say let me set the table a few weeks ago probably about four weeks ago I did my fourth annual valuation of uber okay the company I got obsessed with in I have to be honest I'd never heard of uber in June of 2014 it shows you how much I live on the subway I never take cabs I never take car service so in June of 2014 I saw a Wall Street Journal article that said uber had raised money from venture capitalist would price the company at 17 billion notice the word I used I use the word price the company as opposed what valued never use the word value and VC in the same sentence VCS count value 20 dollar bill in a brown paper bag if you burner they can price everything the difference in value in pricing is valuing you got to understand the business build up to the cash flows come up with a value pricing would either you look at what other people are paying for similar companies based on some metric subscribers users revenue and you attach a price to the company price of 17 billion and I was a little puzzled that was a little person because it's a company I'd never heard of 17 minutes and what do they do I'll take that back I'd actually heard the word uber or seen the word uber on my credit card statements in the previous three months leading into June of 2014 turned out that my second son was going to college in North Carolina was using uber and using my credit card I don't know how that happened you know but I thought he was taking German language classes to be quite honest right the null boom large on the user are kind of givin it away but I I did my first valuation of uber in June of 2014 I revisited in 2015 2016 2017 and essentially I tried my best to make my best judgment on what overdue so this is my 2017 valuation of uber I won't go through the details but essentially started off by telling a story about the company I'm big on telling stories we can't value a company without a story a story about a logistics company with global ambitions that essentially would eventually succeed this is after Travis had left the company so this was in that period of chaos where either people are completely giving up on the company or saying it's coming back from the dead I thought I was being pretty optimistic I came up with the value about 36 billion building up to revenues margins doing all the stuff that you normally do to value a young startup that you think would succeed so I put my evaluation out and one of the things about valuing Silicon Valley companies is people in Silicon Valley absolutely hated when you do that their responses how dare you how do you value one of ours right so I get the usual response from I don't like a revenue number you got missed this and so much of it was about you could have got the inputs wrong as if I'd know that already but one of the response I got from somebody respected fairly well know I've known a long time was you're missing the point this is not the way you should be valuing a company like uber you should really be valuing the company by building up from its users and he had a point because if you think about it we're increasingly a world where businesses are judged by numbers numbers of members numbers of subscribers numbers of users think about the largest market cap company in the world when you take Facebook you think 1.9 billion users when you think Apple you think about more than a billion people carrying smartphones when you think about Google you think about the number of people visiting not just a search engine but YouTube when you think about Netflix like the number that that cause markets to kind of do push the price up 10% was the fact that they added four million subscribers and went above a hundred million we think in terms of users subscribers customers and it's not just a new economy companies if you think about Microsoft increasingly they're judging themselves on how many members are adding to office 365 if you are investing in Adobe it's about how many people have signed up to created club so the point he was making was you have to start thinking about valuation not from the top down which is the way we've traditionally thought about valuation but you have to think about from the bottom up but he actually went further he said this this this DCF which which is the the way it's used in Silicon Valley is as a insult you do DC at the way they actually say it even is you can't use a DCF to value a company based on users and said really so by three weeks ago I decided to think about how you would value a company if you decided to value based on users let me set the table let's start of the first principle that's going to be true whether you think about users top down bottom up the value of a business is a function of its cash flows growth and risk you can't change that no matter what perspective you take about the company the difference here is whether you want to value a company on aggregated basis which is you take the total revenues that mine is a totally which is the way we traditionally do valuation or whether you want a value a company on a disaggregated basis this is not new in fact there's this way of valuing companies called some of the parts valuation so if you gave me a company like United Technologies I could value the whole company as an as an evaluation or I can take each of its six businesses and value each business and add them all up you could give me a multinational company and I could take geographical areas make value each or graphical area separately add them all up and come up with the value for the company or if you gave me user based company presumably I could value a user and aggregate those users to come up with a value for a company so if you think about why we don't usually do that it is not because we don't know how to do it but because we don't have the information that we need to value companies on a disaggregated basis and you're going to see this as I present to you how I would value a company in the user base you're going to see me desperately try to make up numbers as I'm going along not because I feel the urge to make it up but because the numbers are not given to me but essentially I have a platform where if we can give me the information I can value a user for you not just an existing user but a new user so let's set the process up you come to me with the user base company and you can pick your favorite company blue apron if you want I just threw that in there to kind of depress you Thanks in case you invest in the company but essentially my point is we talk about users casually we talk about users as if all users are made equal but I want you to think about an Amazon Prime member Netflix subscriber a Facebook user and start thinking but as I present you with this platform what would drive the value of the user and if you think about the valley B user based company you can actually value the company 3 slices the first is the existing users you have and how much value attached to them the second slices new users you might acquire in the future and how much value attached to them and the third is whether you like it or not there is this corporate drag not not necessarily not you know expenses you don't have to make but these are the expenses of running a business so it's going to be the value of existing users plus the value of new users minus that corporate drag so let's start with the first of those pieces if you ask me the value an existing user and I'd like to set the framework up and as I set the framework up again think about different businesses here's the first thing I'm going to look at I'm going to look at what you make or don't make on an existing user what do you make its revenues per user what do you make what do you spend to service those revenues so that's what you make and you could right now be losing money on a user because you want to kind of cultivate them to make money in the future so you're going to start off with that as your starting point over time presumably your revenues will grow from these users so that's an input that I need how long well that depends on how sticky users are already were throwing in words which are going to matter in my valuation a user who's going to stay on for 20 years is worth a lot more than a user that's going to be gone in six months or a year so depending on how long I think the user will last I build your revenues up so the renewal rates matter because they will drive the value of an existing user now some new models are more predictable than others we talked about a Netflix user versus and Amazon Prime user the value of a Netflix user the revenues come from subscription revenue is much more predictable than revenues from a transaction based model which is what Prime is right because unless you buy stuff on Amazon outside of the 99 dollars they're not making money of you and uber users are all transactions you could be a noble user but you will never hit that app I make no money of you so the business model your dot will affect how predictable those revenues are and from a valuation perspective it's going to show up in what discount rate I apply to a Hamid so you think about what drives our value we use almost everything you think about me user based companies somewhere in that existing user model because your user stickiness and loyalty will drive the life of your user how much you make per user right now will drive it will become your starting point how much more you can sell to that user will drive your growth rate and if I can value all of those I can come up with the value of an existing user now if I get the value of an existing user you're saying what's the value of a new user first it's a lot even users are going to be greater than and less than the value of an existing user well you went because you could acquire that new users so the cost of acquiring that new user will now have to get built into my model so if you ask me what's the value of a new user I'm going to take the value with an existing user that I already have built up and then I'm going to have to estimate how much it costs you to acquire a new user and if you can acquire new users at low cost clearly they're worth more than at a high cost but here there might be a trade-off because if you think about the total value of new users it's a number of new users you get times the value of a new user so you might decide that you're willing to spend more to find new users if you can get more new users obviously like the best of both words acquire a lot of new users and acquire them at a low cost but you might have to spend more to acquire that that larger number so if you think about the value of a new user everything we think about in terms of driving the value of these businesses going to show somewhere again in the inputs and the corporate expense drag of course is the fact that run this there will be some core expenses that you cannot attach to the users they're basically corporate expenses I can't just ignore them because my value as a company is going to be a function of how much those expenses are and what I would value those expenses so ready let's try this on over because that was my intent as I said I'm going to try to value how much a user is worth it over and how much both an existing and a new user and as I go through this as again think about the platform because I'd like you to think about applying this to any other company so we have a problem with you with over to begin with it's a private company so getting to its financials it's like getting to a CIA secret you know it's almost is much of the data you have is either leaked in in fact until 2016 you really did not have any financials 2016 financials were leaked which already makes you a little pause a little bit about whether you can trust them but to the extent that they were leaked here's what Businessweek I think were a bloomberg reported as their numbers from 2016 they had revenues of six and a half billion and then an operating loss of 2.8 billion it's kind of minimalist information but if you trust them on those numbers in 2016 they made six and a half billion dollars in revenues and at 2.8 billion dollars and operating losses which means that expenses were nine point three billion so I started my experimentation to figure out how much they were spending because that nine point three billion includes both the cost of servicing existing users and the cost of acquiring new users already you can see why accounting is failing us on these companies because if you started manufacturing company 30 years ago the cost of servicing existing users were shown as operating expenses but the cost of going out and getting growth was shown as a capital expenditure right in the balance sheet already you can see why when you look at a technology company especially young technology company losing money it's much more difficult to draw conclusions about whether they're truly losing money or what are they spending money to acquire future growth so I try to using their numbers I tried to figure out how much they were spending on existing users and how much I was spending getting new use so you might not like what I did but here's what I did I took the increase in number of users in 2016 which I knew they'd increase the number of users by 16 million in 2016 I took the expansions of adding new users by backing out from then I broke the nine point three billion down into how much for corporate expenses which I could kind of figure out from the GNA how much were the cost of servicing existing members and how much one uses and I estimated that it cost uber about two hundred and thirty nine dollars per user to acquiring new users in 2016 and I estimated that they when you looked at the expenses that that of their overall expenses the operating expenses that they were getting per user but 69 percent of every dollar they were getting in revenues was going to service existing users so I've my starting point so here is my first truck to value an existing user I took those starting numbers again built off those very very limited leak numbers and I applied a 12% growth rate in revenue so what I'm talking about here is your user doober I'm projecting that ruber is going to find a way to get you to spend about 12% more every year and I gave them a user life of about 15 years which i think is pretty optimistic with a very high renew so basically I'm bending over backwards to try to figure out how much a users would so the fifteen year life with a lot of users continuing to keep the app on their phones because we renew earlier basically means you just keep the app you don't delete me it turns out that the value that I get per existing user is 410 million dollars a user sorry for Nintendo they'd love it to be 410 million for in $10 per user they're about 40 million existing users the value that I would attach to their existing users is about sixteen point four billion I'm building off a lot of assumptions but those assumptions are coming from the existing numbers because I'm trying to guess how much of the nine point three billion is coming from service I would hope that Rubin knows what the actual breakdown because inside a company you should have this these numbers you might not reveal them to me but if you're working in a user based company doing this should be part of the process of you building up to the value of your company and figuring out where to direct your resources to get the value of a new user I took those existing users I made assumptions about how many additions and so basically I'm assuming that over the next ten years uber will quadruple its user you buta base from 40 million to 164 million continuing to spend 238 dollars per user growing at the inflation rate but I also factored in that my existing users worth 410 so value my new users added over time is about twenty point two billion so sixteen point two billion from existing users twenty point 1 billion from new users the last item of course is a negative because they have these expenses that have no place to go there are expenses associated with running over as a company that's a ten point six billion dollar drag if I bring them all together the value that I get for uber as a company is about thirty seven point two billion it's actually 26 billion for their existing assets but they're five billion in cash which I'm guessing because it's seven billion two months ago but the way they burn through cash that might be 1 billion by now I have no idea right so I'd love to call their bank and say how much money does uber have in their checking account but I don't think I'll get an answer so I'm guessing it's 5 billion you know the other six billion is last year ooh BRR removed itself in the Chinese market it did it because it was leaking so much money that it decided couldn't afford to stay there and in return for leaving D detoxing gave them to you know a slice of DD China that slice is worth six billion so you add them all up the value that I get is 37 billion so I said look you know I can value ruber basically so when I put this out they said all these I guess guesses of course I guess is the numbers that I'm basing it on are or what I can observe and I can't see much and I'll if you think that it's going to get better when uber gets goes public you're missing the point because public companies don't have to provide the user base in form a we need to value these companies me so if I were writing I mean I every year I said these suggestions the Financial Accounting Standards Board they keep ignoring me because they keep getting caught up in these writing rules about things that nobody cares about if I were writing rules on disclosure these are the rules I would write for investors in these companies I need to know more specifics about you users I need to know how many of you use of cancer their subscriptions every year I need to know specifics about users not because I'm just curious but because if I want to value a company to use a basement I know what information I need now I know I don't have very much time but let me hit let me hit a few points using this framework when when you see a company but lose money when they had that 2.8 billion dollars that was a headline uber loses 2.8 billion people react to one of two ways the optimist said hey doesn't matter if you lose money which is absurd of course it matters if you lose money and the pessimist said it means our ubers worth nothing the pessimist of course are the ones who would never buy a young company because to them young companies always worth nothing whether they lose money so I'm going to make a statement that's going to sound absurd if a company loses money there are good ways to lose money and bad ways to lose money let me talk about the good ways to lose money if you're looking at a company with losses I'd much rather that those losses come from you spending money to acquire new customers than servicing existing users it makes sense in fact I took my uber numbers and said look I guess how much was going but what if the numbers have been different the greater the percentage of ubers expenses that come from acquiring a new user the more the value the company is in fact the value the company increases to 51 billion if most of their or all of their expenses comes from acquiring new users next time you see a money-losing company one stop and ask is it losing money because it's servicing existing members or existing users or is it going off to new users here's a second I'd like to know how much of your costs are fixed and variable and I'm not talking some accounting distinction variable explain expenses that grow with your revenues fixed expenses are expenses that don't grow their revenues this is where economies of scale kick in if your expenses keep growing at the same rate as revenues you're in deep trouble because you're losing money it's Justin that doesn't work for you so I'd like to know how much of your expenses are fixed and how much are variable so if you're asking questions about money losing companies you'd start with that here's the other thing that I find this platform useful for thinking about a lot of buzzwords around us especially with technology now right networking benefits Big Data and I can go through the list but I would argue that with this platform we can start to get specific about why they matter I'm going to show you a picture that kind of brings brings on this Oh before I do that when you talk about growth there are good ways to grow and bad ways to grow I'd much rather that you grow by selling more to your existing subscribers that growth is worth a lot more than growing by going on adding new users having more intense existing subscribers is worth more than adding new users simply because when you users you have that user cost the cost of acquiring a new user against it and it does matter what these models so let me use this platform to talk a little bit about the buzz words to me here is the perfect way to think about you use a base company you can have you companies with lots of users that are worth nothing you can have companies with a lot of users that are would incredibly large amount so it's going to sound incredibly simplistic but user based companies are worth a lot have found a magic combination they get a high value per user and they have a low cost of acquiring users you see why that's uncommon because you have low cost acquiring users and everybody has low cost acquiring users what's going to happen in this business competition is going to come in so you somehow got to find a way that you get high value per user but your costs a little bit everybody else in the business has either high costs of acquiring users or low value here's what the networking benefits and Big Data come in what's the definition of networking benefits it gets easier to grow as you get bigger right that's my definition of networking benefits is as you get bigger it getting easier for you to go because for some reason you become a more attractive place for customers to go you know what that tells me in this model as you get bigger what's happening to cost of adding new users it's actually getting lower so if you can get networking benefits to work for you you can bring your cost of acquiring new users down whereas your competition is high cost acquiring users let's talk about Big Data again use very fuzzy but if you think about Big Data what are you doing you're acquiring data on your existing users why not because you love data I hope that's not the reason but because you want to use the data to sell them more it shows up as higher revenue growth if you can get that magic combination of networking benefits pushing your cost down and the fact that you can sell more to your customers with big data you've got the magic combination to becoming a valuable company I already talked about revenue models and how they play out there's a trade-off here if you look at subscription-based models the power of subscription-based models is that they give you more stable revenue the power of transaction based models is you can sell the growth you can get from existing users it's much higher because you can sell them more stuff and the power of an advertising based model is you can show high growth very early in your life because it doesn't cost you very much require users if you ask me what's the right model for me as a company I can't answer without knowing where you are in the lifecycle what kind of business here there is no dominant model here but any for any company there is a dominant model and I'm going to close off with one final thought about real options is the word we throw around one of the reasons it's nice to have an intense user base of it is attached to you is you might find ways to sell them you can't even thought about this yet but other things in the future that's what a real option is again with the user base model you can attach the value that real option to how intense those users are you have and how much time you have there's a reason why Facebook has the wondrous valuation that it does it has the numbers 1.9 billion it has the intensity they spend an hour every day and even if they haven't figured out what to do with you yet if you're a Facebook user think of all the things they could come up with in the future that they could try to sell you over than one hour time period there's an incredible real option value in you so as you think about Netflix or Amazon and any other user base companies start thinking about these specifics and perhaps we can then figure out why uses it some companies or what a lot more why is it twitter user what's so much less than a Facebook user why's an Amazon Prime member what's so much more than a Costco member so in a sense you can start describing why values can be different across different companies by setting up the platform for thinking about the value of new users it's something I'm planning to spend the rest of my summer on the scent I essentially each week I'm going to take I'd only one company week up too lazy so I'll take you know next week I want to spend on our what's the value of a prime member to Amazon because increasingly that's the way I want to think about companies because it gives me that that lever to think about why values are different so I've been told to to direct you elsewhere so let me see if I can find that page that everyone will so just a couple questions have you valued snapchat yep I the good side about snapchat is that their users are intense much more intense in a Twitter users the bad the promised nap chat is they're competing in a space where there are two giants who suck up all the oxygen Facebook and Google which means for them to succeed they've got to find a niche they can't be all things to everybody they got to find a niche and when I valued snapchat at the time of the IPO I I thought I was being pretty optimistic in my numbers but alia God was about $11 per share but the reason I had to hold back was I said even if you're successful you're going to be a niche advertising company and as a niche advertising company I don't see a value being greater than the 11 dollars per share maybe there's a way in which they can break out but I think given the competition that they get from just Google and Facebook it's going to be really tough to do and when you look across the ecosystem a Netflix subscriber a prime household a Facebook user user it give us just a quick order most valuable - least valuable a Netflix subscriber is the most predictable revenues but the lowest revenue growth per user because very user metrics on come back and say this year it's going to be 200 so it's got low growth low growth for user that's about side but very predictable revenues because every month you pay that $10 whatever you pay an Amazon user a prime member is potentially at the highest option value because in a sense Amazon has 70 million members and they're lining up everything but the kitchen sink to try to sell you right so if you look at home so if you look at the whole food acquisition that's the way I see it is it's another way in which they can pump up the value of a prime member by selling you stuff you wouldn't have bought otherwise and a Facebook user I think just to share numbers I think per user the value might be lower but you're multiplying about 1.9 billion and if Mark Zuckerberg as is where that could be 3 billion so I think your Facebook it's the numbers that drive the value with Amazon it's a potential for what they can do with you and with Netflix just assure predictability of those revenues because turning off a subscription is an act that people take don't take easily so it's much more predictable and much more long-term so each has a strengths so within each business so you can compare why a Netflix subscribers worth more than a Pandora subscriber you can start thinking about what to buy them and that's why I think within each if you compare across you can start to see why a value of a user can vary even within the same space so two more questions so when Assad announces on his blog or and media that he's in the midst of evaluation of a company that companies IR Department literally hold its breath until that number comes out the now swap when you look so look looking across the new economy ecosystem and all the names snap at eleven bucks came out at 20 20 28 now it's 15 or whatever I would imagine a lot of evaluations are coming in south of where they are now can you give us a bit everyone talks about the when you have valued that is your number was most dramatically below where it is and are there any revaluations were dramatically about what are the most under it overvalued companies in the world right now according to your methodology the nature of markets with these companies the manic-depressive which is when they're optimistic that way too optimistic when they're pessimistic they sell off so I remember when I know it Facebook when they went to read public I didn't buy it but I did buy three months later after its first annual report which struck me is incredibly crazy that after one annual report you're willing to reassess the entire future of a company in the analogy I would give it's like your kindergarten are coming back with a report card you taking a look and saying you're not going to college perhaps you're overreacting right and so I bought Facebook at eighteen that was my good moment the bad moment was I sold too early but I have to stay consistent what brought me to the dance which is I buy something when it's cheaper I would buy snap one of these days now I'm convinced and said to me it's a continuum the game doesn't end and that's why I keep revisiting these valuations it's at the right price I'd love to have over in my portfolio I think it's changing the world at the wrong price I'm not interested but I would say that about any of these companies is watch them over time don't give up on them because to the extent that there's there is value in this company there will be a time with this selling at the right price okay so again what's most wrong and what's most right out there I find I I think Netflix I think is get is close to what I think it should be at in terms of because I think people are reflecting the fact that the way we get entertainment is changed Netflix is the forefront Amazon I find tough to get to the value that you need to because so much has to go right yeah okay and I've loved them in a bought Amazon for x and so diamonds on four times the last twenty years which has me where I am which tells you where I am right now but I think so much has to go right that I am reluctant to buy the prices that they're trading it right now it's like they've got to become so dominant in this space for me to make money well we've been huge Amazon bears and our conference so that's good to hear a lot of people in the room last question are thinking about they have a lot of people who have business models that they spend a lot of money on brand awareness and equity building and then it's transactional model they go into a point of distribution and buy the product at high margin do you think in a lot of companies are thinking about they they have kind of software IAM the recurring revenue around being that's thinking about subscription models do you think it makes sense for a lot of the brands in the room to really explore moving to a different economic model now one of the reasons I've put up all three is there's a trade off a subscription-based model will give you more predictable revenues but lower growth so the companies which will lose by going to subscription-based model are the ones that would have gained by having a transaction based model where potential growth would be high so it really depends on where you are in the lifecycle and what you users think about you so I think some companies will lose money by going to a subscription-based model or lose value because they've traded off more predictable revenues for revenues where they could potentially get higher growth so I'm not sure a subscription model is right for a lot of companies because I think that the transactions are where the value might come from so even within Microsoft I think the jury is still out as to whether office 365 will deliver more value for them in the long term then the old model of hey let's come out with a new office update every two years or three years and make people buy and I think what tips the balance is whether you you're the only game in town which is what Microsoft was for a long time or whether you're competing in a space where people are looking at other ways of doing spreadsheets Word etc because they're working with the tablets so I think what tip the Scalia was the shifting away from desktops of Microsoft thank you for us [Applause] [Music]

Channel: Gartner for Marketers

Views: 73,998

Rating: 4.9463277 out of 5

Keywords: L2inc, Brand strategy, aswath damodaran, uber, market cap, stock, finance, mba, professor, management, digital economy, business valuation, digital research, nyu stern, user based valuation, new york university, stern school of business, corporate finance, investment management, equity instruments, real estate, valuation, uber valuation, traditional discounted cash flow

Id: VlcmHhbYeNY

Length: 35min 15sec (2115 seconds)

Published: Wed Jul 26 2017