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How the dean of valuation prices loss-making tech stocks — and his views on Amazon, Netflix and Airbnb

By Steve Goldstein

Critical information for the trading day

It feels like almost every new company, particularly in the technology space, that is coming to market is loss making. "Most of the old-time metrics we use, price-to-earnings, price to book, EV to EBITDA, were designed for mature companies," says Aswath Damodaran, the professor of finance at New York University's Stern School of Business who's known as the "dean of valuation."

"To go into the mind-set that's what the future looks like, already you have three strikes against these stocks," he says in an interview with Mark Mahaney, head of internet research at Evercore ISI. Instead, he thinks investors need to look at revenue growth, and total addressable market; what margins they expect at a steady state; and the level of reinvestment needed for growth.

For Airbnb (ABNB), a company he likes, their steady-state margins should be "sky high" because it's an intermediary model and it costs almost nothing to connect renters to homeowners. Reinvestment, in Airbnb's case, is acquisitions. "Tech companies might not have land, building, equipment and machinery, but they spend like drunk sailors on acquisitions and technology," he says.

Damodaran concedes he will be "horribly wrong" on every company he values, but this is where the law of large numbers works in his favor. "All I need is to match the market and make a little bit more," he says. "People who go out looking for 10 baggers off the top are asking to be scammed," he adds.

Here are Damodaran's views on selected companies.

The chart

The market and the Fed are pretty close in the interest-rate outlook, at least for the next few years. The difference really is further out -- by 2025, the market is nowhere near the Fed's long-term rate view.

The buzz

Property developer China Evergrande surged in Hong Kong trade on indications it's working to pay off creditors. One investor, Chinese Estate , said it may sell its entire stake in Evergrande. The Wall Street Journal reported that Chinese authorities are asking local governments to prepare for Evergrande's downfall

Jobless claims surged due to a rise in California, while preliminary purchase managers indexes and leading indicators data come out shortly after the open.

Costco Wholesale (COST) and Nike (NKE) are due to report quarterly results after the close.

Darden Restaurants (DRI) rose in premarket trade after increasing its fiscal 2022 guidance.

The market

Stock futures were gaining ground a day after the Federal Reserve took a step toward tapering. The yield on the 10-year Treasury rose to 1.36%.

The Turkish lira slumped after a surprise decision to cut interest rates.

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-Steve Goldstein

 

(END) Dow Jones Newswires

09-23-21 0915ET

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