Session 1: Class Logistics and Structure

Name: Session 1: Class Logistics and Structure
Uploaded: 2025-01-23T01:57:05.000Z
Duration: 2 h 30 min 51 s

Introduction to Valuation Class

Classroom Dynamics and Personal Anecdotes

The speaker begins by addressing the class while waiting for a wireless microphone, indicating an informal start.

Reflects on his children's college choices, humorously noting that none chose NYU despite its no-tuition offer.

Shares experiences from orientation tours, highlighting the exaggerations made about faculty availability.

Describes the classroom's ambiance as uninviting, comparing it to Madison Square Garden on a bad day.

Discusses the room's poor acoustics and plans to repeat student questions for clarity during discussions.

Student Demographics and Course History

Engages with students about their academic standings (freshmen, sophomores, juniors, seniors).

Mentions his long tenure at NYU since 1986 and reflects on how time has passed in teaching.

Introduces "Security Analysis," a course with historical significance taught since the 1950s by Ben Graham.

The Evolution of Valuation Education

Initial Resistance to Teaching Valuation

Initially finds "Security Analysis" boring and expresses reluctance to teach it due to its outdated content structure.

Critiques the course's focus on institutional details that seem irrelevant in modern contexts.

Challenges in Curriculum Development

Recounts a conversation with his department head who doubted there was enough material for a valuation class.

Notes that when he sought resources for teaching valuation in 1986, there were few available books or materials.

Historical Context of Valuation Literature

Discusses Ben Graham’s "Security Analysis," emphasizing its context during the Great Depression which shaped its risk aversion themes.

Expresses determination to teach valuation despite initial skepticism from colleagues regarding available content.

Navigating University Bureaucracy

Strategies for Success in Academia

Advises against seeking permission for new initiatives within university settings due to bureaucratic delays.

Illustrates how committees can hinder progress through endless meetings without resolution.

Valuation Insights from 60 Semesters of Teaching

Introduction to Valuation Class

The speaker reflects on teaching valuation for 59 semesters, with the upcoming semester marking the 60th.

Emphasizes that all knowledge about valuation has been acquired through teaching this class, not from external sources.

Historical Context: Black Monday

Recounts a significant event in October 1987 when the S&P 500 dropped by 22% in one day, known as Black Monday.

Discusses the panic and disbelief among market participants during this drastic drop, comparing it to potential modern-day impacts.

Market Crises and Their Causes

Students questioned how valuation tools could explain such a massive market loss; the speaker admits uncertainty but seeks answers.

Reflecting on crises since 1987, he expresses hope for stability during the current semester while acknowledging unpredictability.

Evolution of Public Markets in the '90s

Highlights a shift in public markets during the '90s where companies with high potential but no established business model began going public.

Shares an anecdote about valuing Amazon.com in 1997, noting challenges faced due to its unique business model at that time.

Lessons Learned from Valuing Young Companies

Describes keeping a detailed journal while valuing Amazon, which later became a book titled "The Dark Side of Valuation."

Connects lessons learned from Amazon's valuation to contemporary companies like Uber and Airbnb that also lack established business models.

Systemic Risk and Financial Crises

Moves forward to discuss systemic risk observed during financial crises, particularly referencing events around 2008 caused by banks' risky behaviors.

Raises questions about why systemic risks affect everyone when banks fail compared to individual company failures.

The Numbers Game: Social Media Giants

Introduces Facebook as an example of a numbers-driven company; emphasizes user base size over traditional metrics like revenue or margins.

Valuing Netflix Subscribers: Insights and Methodology

Understanding the Subscriber Model

The speaker highlights that no entertainment company has achieved close to 300 million subscribers paying around $20-$23 monthly, emphasizing the unprecedented scale of Netflix's subscriber base.

A discussion begins on how to value a Netflix subscriber, with an emphasis on understanding individual payment amounts and subscription dynamics.

Churn Rate and Subscriber Longevity

The speaker shares personal experiences with family subscriptions, illustrating common challenges in accessing shared accounts.

To value a subscriber, it's crucial to know their expected duration as a subscriber; this involves understanding churn rates—Netflix's renewal rate is approximately 95%, indicating high retention.

Revenue Projections

With a 95% churn rate translating to an average lifespan of about 15 years for subscribers, the next step is estimating annual subscription revenue over this period.

Anticipating yearly price increases (potentially at inflation rates), the speaker discusses projecting future revenues from each subscriber.

Cost Analysis and Cash Flow

The cost of servicing a Netflix subscriber is relatively low since content isn't produced specifically for individual users. This leads to significant cash flow potential from subscriptions.

In 2017, the estimated value of a U.S. Netflix subscriber was calculated at around $500 based on these factors.

Global Variations in Subscriber Value

The speaker contrasts U.S. subscribers with Indian subscribers, noting that pricing differences (e.g., iPhone-only plans at $4/month in India) affect overall valuation significantly.

Analysts often overlook questions regarding where new subscribers come from; understanding geographic differences in value is critical for accurate assessments.

Comparing Subscription Models: Spotify vs. Netflix

Structural Differences Between Services

Transitioning to Spotify, the speaker notes similarities with Netflix but highlights key differences in cost structures related to content consumption.

Variable Costs Impacting Value

Unlike Netflix’s fixed costs per user, Spotify incurs variable costs based on streaming activity; thus, each additional listener can increase operational expenses significantly.

Implications for Valuation

This difference suggests that Spotify subscribers may be valued less than Netflix ones due to higher associated costs per user when considering increased subscriptions.

Exploring Other Subscription Models

Uber's Unique Business Model

Uber Usage and Valuation Challenges

Personal Anecdotes on Uber

The speaker discusses their son's frequent use of Uber, highlighting the reliance on this service for communication and assurance of his well-being.

The speaker humorously speculates that their son uses Uber excessively, suggesting a pattern of multiple transactions in a single night.

Valuing User-Based Companies

The complexity of valuing user-based companies like Uber is introduced, noting the significant divergence between small and large users.

Amazon Prime is presented as an example where valuation can be tricky due to its subscription model and additional benefits provided to members.

Valuation Insights from Amazon Prime

Understanding Consumer Behavior

It’s noted that typical Amazon Prime members spend three times more than non-members, emphasizing the impact of membership on consumer behavior.

The speaker reflects on how personal experience with Amazon Prime informs their understanding of its value proposition.

Impact of COVID-19 on Education

Transition to Online Learning

A sudden notification from the university prompted a shift to online classes due to COVID-19, marking a significant change in teaching methods.

The speaker recounts how they continued teaching online without returning to campus for over a year.

Challenges in Teaching During Pandemic

Students were tasked with valuing companies during market uncertainty caused by COVID, leading to unique challenges in class discussions.

An anecdote about a student choosing Boeing as their company highlights the difficulties faced by industries severely impacted by the pandemic.

Teaching Philosophy and Class Logistics

Focus on Critical Thinking

The speaker emphasizes that their goal is not just to impart wisdom but rather provide insights into critical thinking processes related to valuation.

Class Structure and Communication

Details about class logistics are shared, including office location and preferred communication methods via email for efficient responses.

Office Hours and Support Systems

Valuation: Art, Science, or Craft?

Weekly Review Sessions

Optional weekly review sessions will be held to work through practice problems and past quizzes/exams. The instructor prefers not to spend class time on these exercises.

Philosophical Basis of Valuation

The instructor emphasizes that the philosophical foundation discussed in the first 25-30 minutes is more crucial than technical details like cost of capital or cash flow.

Is Valuation a Science?

A question arises whether valuation is an art or a science. The instructor suggests starting with the scientific perspective.

Mathematics is presented as a pure science; correct inputs yield definitive outputs, unlike valuation where uncertainty prevails.

Limitations of Valuation as a Science

Despite efforts to value companies accurately (e.g., NVIDIA), the instructor acknowledges that predictions about future revenues and earnings are inherently uncertain.

Even with accurate inputs, one can still arrive at incorrect valuations due to unpredictable market conditions.

Valuation as an Art Form?

The discussion shifts to whether valuation could be considered an art. An anecdote about Picasso illustrates that great art cannot be easily taught.

If valuation were purely an art form, it would imply that teaching it over decades has been futile.

Valuation as a Craft

The instructor proposes that valuation should be viewed as a craft akin to cooking. Mastery requires practical experience rather than just theoretical knowledge.

Learning Valuation Through Real-World Application

The Importance of Practical Experience in Learning

Cooking is learned by doing, similar to how valuation is best understood through practical application rather than theoretical discussions.

Students will learn valuation by valuing a real company instead of relying on case studies, which are often unrealistic and detached from the actual market.

Weekly Valuation Assignments

Each week, the instructor will present a "valuation of the week," where students will value the same company after seeing the instructor's analysis.

Students are encouraged to choose companies that interest them for valuation exercises, such as Tesla or Nvidia, which are relevant and newsworthy.

Building Confidence in Valuation Skills

Initially, students may feel hesitant to challenge the instructor’s valuations but will gradually become more confident in their analyses as they progress through the course.

The course aims to expose students to various types of companies and industries to broaden their understanding and skills in valuation.

Understanding Value vs. Price

A key theme is distinguishing between 'value' (driven by cash flows, growth, and risk) and 'price' (influenced by demand, supply, mood, and momentum).

The instructor emphasizes that mastering valuation is an ongoing process; one cannot claim complete knowledge of this craft.

Behavioral Finance Insights

Factors like mood and revenge can significantly impact asset prices beyond traditional financial metrics.

Understanding Valuation vs. Pricing in Finance

The Distinction Between Valuation and Pricing

The speaker emphasizes the difference between valuing a company and pricing it, noting that valuation involves understanding the business model, estimating cash flows, growth, and risk.

In contrast, pricing focuses on what others are paying for similar companies, highlighting the use of multiples like PE ratios and comparable companies.

Analysts should avoid using "value" when they are actually pricing; this distinction can lead to significantly different numbers.

Most professionals entering finance will primarily engage in pricing rather than valuation, questioning the appropriateness of discounted cash flow models for such tasks.

The speaker plans to cover a wide range of businesses for valuation purposes across various sectors.

Valuing Different Types of Companies

The discussion includes valuing both public and private businesses, with examples ranging from established firms to startups and even struggling companies like Bed Bath & Beyond.

A unique example is presented regarding sports players' valuations; specifically discussing Shohei Ohtani's impact on team value through merchandise sales and market expansion.

The speaker notes that modern sports team value derives more from media rights than ticket sales or stadium attendance.

Ohtani's contract is analyzed as an example of how contracts may not reflect true value due to deferred payments; his actual worth is estimated lower than reported figures.

The conversation shifts to how teams price players based on what others have paid rather than intrinsic value.

Broader Implications of Value in Business

As teams negotiate player contracts, they often look at recent deals for similar players as benchmarks—this reflects a broader trend in business where pricing strategies dominate over intrinsic valuations.

An example involving Lionel Messi illustrates how individual players can affect broader business metrics (like subscriber growth for Apple TV+).

By the end of the course, students should be able to articulate whether assets like Bitcoin are undervalued or overvalued based on informed reasoning rather than speculation.

Perspectives on Valuation

Understanding Valuation: The Intersection of Numbers and Stories

Early Experiences with Literature and Learning

The speaker reflects on their early experience in an English literature class at age 12, where they were surprised that the discussion did not focus on the whale in "Moby Dick."

The instructor's dismissal of the whale as a metaphor left the speaker feeling confused and disillusioned about literary analysis, leading them to avoid literature classes throughout school.

Preference for Numbers Over Stories

The speaker emphasizes their preference for mathematics over literature, recalling a time when college curricula forced students to take various subjects, including history.

They argue that if students could solely focus on numbers, it would lead to a more straightforward educational path without unnecessary distractions.

Identifying Personal Strengths: Numbers vs. Stories

A rhetorical question is posed to the audience regarding their natural inclinations towards numbers or storytelling, highlighting a divide between these two types of thinkers.

The speaker challenges assumptions about valuation being purely numerical, suggesting that true valuation requires understanding both numbers and narratives.

The Role of Storytelling in Valuation

It is asserted that valuation cannot be limited to spreadsheets; rather, it must connect stories with numbers for meaningful insights.

A good valuation bridges quantitative data with qualitative narratives, emphasizing that every number should have an accompanying story explaining its significance.

Case Study: Tesla's Revenue Projections

When discussing Tesla's projected revenues of $500 billion in Year 10, the speaker stresses the importance of justifying such figures through concrete business strategies.

Questions arise about how Tesla can achieve this revenue level compared to industry giants like Volkswagen and Toyota.

Exploring Business Models Beyond Traditional Metrics

The discussion shifts towards potential revenue streams for Tesla beyond car sales, such as automated driving features and software upgrades.

Emphasis is placed on how software integration transforms vehicles into valuable assets rather than mere transportation devices.

Connecting Management Successes with Financial Outcomes

Every claim about company management quality must be substantiated by specific actions or results achieved by leaders within those companies.

Nvidia's Market Strategy and Growth

Nvidia’s success is attributed to its strategic entry into new markets ahead of competitors—first gaming, then cryptocurrency—and now artificial intelligence (AI).

This proactive approach has allowed Nvidia to maintain high margins by focusing on design rather than manufacturing chips themselves.

Understanding Valuation and Management at Nvidia

The Role of Great Management

The speaker emphasizes that success is not merely luck but a result of intentional design by great management, particularly at Nvidia. This prompts reflection on what constitutes effective management in the context of future market opportunities.

Importance of Specificity in AI Discussions

The speaker critiques vague references to AI, urging for clarity on its benefits and applications. They stress the need to connect narratives with quantitative data when discussing company performance.

Storytelling in Valuation

When valuing companies, the speaker highlights the importance of storytelling alongside numerical analysis. They acknowledge that while spreadsheets are essential, understanding the narrative behind numbers enhances valuation accuracy.

Crisis of Faith in Valuation

The speaker shares a personal experience from 1991 regarding a "crisis of faith" in their valuation methods. They clarify that their motivation for valuing companies stems from a desire to profit rather than mere curiosity.

Building Faith in Valuations

Two types of faith are necessary: confidence in one's own valuations and belief that market prices will align with intrinsic value over time. The speaker admits that proving these valuations is challenging and often requires faith similar to religious beliefs.

Navigating Doubts and Market Movements

Testing One's Faith

The speaker discusses how stock price movements can challenge one’s confidence in valuations, likening it to spiritual tests where one must reaffirm their beliefs amidst uncertainty.

Accepting Uncertainty

Acknowledging doubt is part of the process; even figures like Mother Teresa questioned their beliefs daily. This perspective allows for flexibility and acceptance within valuation practices.

Valuation Process Overview

Structure of Upcoming Sessions

The upcoming sessions will cover foundational concepts before diving into specific company valuations across various stages (young, old, declining).

Pricing Companies vs. Valuing Assets

There will be discussions on pricing methodologies such as P/E ratios and EBITDA multiples, including common pitfalls associated with these metrics.

Special Topics in Valuation

Future sessions will address unique aspects like valuing individual assets or privately owned businesses, as well as applying option pricing models for certain types of companies (real options).

Understanding Company Valuation and Skills Required

Introduction to Company Valuation

The speaker discusses the role of a CEO in increasing company value, emphasizing the importance of understanding valuation frameworks as students prepare to submit their own company valuations.

A comparison will be made among class participants regarding how many find their companies undervalued or overvalued, providing insights into market perceptions across semesters.

Essential Skill Sets for Valuation

The speaker highlights three critical skill sets necessary for effective company valuation: accounting knowledge, data analysis through statistics, and finance fundamentals.

Emphasizes the need for a solid grasp of accounting concepts such as gross income, operating income, and net income to interpret financial statements accurately.

Data Analysis and Statistics

Discusses the overwhelming amount of data available today and the necessity of statistical tools to navigate this complexity effectively.

Suggests that students should focus on understanding regression analysis rather than just running regressions, as modern tools automate much of this process.

Finance Fundamentals

Stresses the importance of mastering present value calculations as part of foundational finance skills essential for valuation tasks.

Introduces a specialized foundations class designed to cover key finance topics relevant to the course material.

Course Structure and Weekly Challenges

Outlines the course structure where weekly challenges are provided based on class discussions, encouraging deeper engagement with material.

Describes a system akin to GPS tracking for project progress throughout the semester, aiming to keep students accountable for their learning journey.

Communication and Resources

Details plans for regular updates via webcasts addressing practical issues like estimating risk-free rates in different currencies.

Mentions a weekly newsletter aimed at keeping students informed about lecture notes and upcoming tasks while preventing them from feeling lost in a large class setting.

Engagement Strategies

Explains that solutions to optional weekly challenges will be shared every Sunday, allowing those who attempted them to verify their answers without pressure.

Encourages active participation by sending out summaries after each class session so that even if students mentally disengage during lectures, they can catch up later.

Weekly Valuations

Class Overview and Resources

Class Enrollment and Tuition

The class has 10,355 participants, highlighting its popularity. The instructor notes that the online recordings will be available for all students.

Questions arise regarding tuition costs, with the instructor comparing their fees to other institutions charging around $200 per session.

Attendance and Lecture Notes

Lecture notes are provided in three updated parts for Spring 2025, available in PDF or PowerPoint formats.

The PowerPoint format includes a notes section but may have compatibility issues between Mac and PC versions.

Class Material Accessibility

Recorded classes will be accessible on YouTube for convenience, allowing viewing on various devices without requiring high bandwidth.

All sessions will be linked in a central location, ensuring easy access to materials used throughout the course.