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1、P1: OTA/XYZP2: ABC c34JWBT347/MckinseyMay 27, 201016:13Printer Name: Hamilton34Valuing High-Growth CompaniesValuing high-growth, high-uncertainty companies is a challenge; some practi-tionershaveevendescribeditashopeless.Wefind,however,thatthevaluation principles in this book work well even for high
2、-growth companies. The best way to value high-growth companies (those whose organic revenue growthexceeds 15 percent annually) is with a discounted cash flow (DCF) valuation, buttressed by economic fundamentals and probability-weighted scenarios. Although scenario-based DCF may sound suspiciously re
3、tro, it workswhere other methods fail, since the core principles of economics and finance apply even in uncharted territory. Alternatives, such as price-earnings multi- ples, generate imprecise results when earnings are highly volatile, cannot be used when earnings are negative, and provide little i
4、nsight into what drives the companys valuation. More important, these shorthand methods cannot account for the unique characteristics of each company in a fast-changing environment. Another alternative, real options, still requires estimates of the long-term revenue growth rate, long-term volatility
5、 of revenue growth, andprofit marginsthe same requirements as for discounted cash flow.1 Since DCF remains our preferred method, why dedicate a chapter to valu- ing high-growth companies? Although the components of valuation are the same, their order and emphasis differ from the traditional process
6、for estab- lished companies, and this chapter details the differences. Instead of analyzing historical performance, start by examining the expected long-term develop- ment of the companys markets and then work backward. In addition, since long-term projections are highly uncertain, always create mul
7、tiple scenarios. Each scenario details how the market might develop under different condi-1In Chapter 32, we demonstrate how real options can lead to a more theoretically robust valuationthan scenario analysis. But unlike scenario analysis, real-options models are complex and obscure the competitive
8、 dynamics driving a companys value.741P1: OTA/XYZP2: ABC c34JWBT347/MckinseyMay 27, 201016:13Printer Name: Hamilton742VALUING HIGH-GROWTH COMPANIEStions. Nevertheless, while scenario-based DCF techniques can help bound and quantify uncertainty, they will not make it disappear: high-growth companies
9、have volatile stock prices for sound reasons.VALUATION PROCESS FOR HIGH-GROWTH COMPANIESWhen valuing an established company, the first step is to analyze historicalperformance. But in the case of a high-growth company, historical financial results provide limited clues about future prospects. Theref
10、ore, begin with the future, not with the past. Focus on sizing the potential market, predicting thelevel of sustainable profitability, and estimating the investments necessary to achieve scale. To make these estimates, choose a point well into the future, ata time when the companys financial perform
11、ance is likely to stabilize, and begin forecasting. Once you have developed a long-term future view, work backward to link the future to current performance. Accounting records of current performance are likely to mix together investments and expenses, so when possible, capi- talize hidden investmen
12、ts, even those expensed under traditional accounting rules. This is challenging, as the distinction between investment and expense is often unobservable and subjective. Given the uncertainty associated with high-growth companies, do not rely on a single long-term forecast. Describe the markets devel
13、opment in terms of multiple scenarios, including total size, ease of competitive entry, and so on. When you build a comprehensive scenario, be sure all forecasts, includingrevenue growth, profitability margins, and required investment, are consistent withtheunderlyingassumptionsoftheparticularscenar
14、io.Applyprobabilistic weights to each scenario, using weights that are consistent with long-term historical evidence on corporate growth. As we saw during the Internet run- up, valuations that rely too heavily on unrealistic assessments can lead to overestimates of value and to strategic errors.Star
15、t from the FutureWhen valuing high-growth companies, start by thinking about what the in- dustry and company might look like as the company evolves from its current high-growth, uncertain condition to a sustainable, moderate-growth state in the future. Then interpolate back to current performance. T
16、he future stateshould be defined and bounded by measures of operating performance, such as penetration rates, average revenue percustomer, and sustainable gross mar- gins. Next, determine how long hyper growth will continue before growth stabilizes to normal levels. Since most high-growth companies are start-ups, stable economics probably lie at least 10 to 15 years in the future.P1: OTA/XYZP2: ABC c34JWBT347/MckinseyMay 27, 201016:13Printer Name: HamiltonVALUATION PROCESS FOR HIGH-GROWTH
