The valuation method I would choose for my project of Netflix is the income
approach method. The income a company generates would be valued as a
result of using this method. It is a general way of determining the value of a
business my converting anticipated economic benefits into a present single
amount, or to the present value of all future cash flows that the business
expects to produce. Netflix generates revenues by offering subscriptions to its
services.
The market approach is a method of determining the value of an
asset based on the selling price of similar assets. This approach
studies recent sales of similar assets, making adjustments for the
differences between them. The market approach relies on
comparisons to similar assets, it would be most useful when there is
enough data on recent sales to compare assets. b Meaning if I were to
compare sales of Nike to Adidas, which is one of the top competitors
of Nike, this would give enough information on what it is that Nike
needs to do to boost sales. This may come in a form of more
advertisement or just a way to cut costs to boost revenue.
Any company that is public is going to run the risk of its industry as
competition seems to be what drives the ups and downs of pricing.
The size of the company and where that company sells goods and
services also play an important role in how well the company's
revenue will be. b This applies to global markets as well with the
foreign exchange rate.
Most public companies use a cash flow or discounted flow approach to value
their stocks. This is due to the free cash flow being able to be distributed as
dividends.
For my valuation company, I chose Nike and the earnings-based approach
instead. b The residual income valuation approach uses book value of common
shareholders’ equity and expected future earnings to determine the value-
relevant expected future payoffs to the investor in place of future dividends or
future free cash flows. I believe this is the best way to value a company such
as Nike because Nike’s cash should be used as investment (inventory, R&D,
stores, advertising etc) to continuously grow their revenue and ultimately their
bottom line. By doing this, the equity/stock becomes more valuable over time.
Since Amazon has so many different areas including marketplace
selling, web services, and content made specifically for Prime, I think
the best way to value the company is to use the discounted cash flow
as it estimates the value based on its expected future cash flows. b I
like this method as it gives an estimate of what can come from the
investment and whether or not that investment has the potential to
be profitable. I would really like to split the company's earnings into
the three sections I mentioned earlier to get a better feel for what is
really working well for Amazon, but I don't know if I can find the
actual data for each area and have it be accurate. Maybe the best
course of action would be to figure the company's DCF valuation and
then figure out the percentages of what services bring in for revenue.
The company I chose for the main project is Microsoft. The valuation
method I would use to valuate Microsoft would be a fair value
market approach. This method would be used to determine the
appraisal value of the business, its' assets, and its' interest and
securities by researching and comparing the market prices of
comparable assets and businesses in the technology industry. Since
Microsoft is such a large company and has such a following, so
determining the value of a share of stock should be determined first
by looking at the prices of stock that are similar to it in its' industry as
a baseline, and go from there. This would be a good jumping off point
to see what price is fair to sell shares at from an industry standpoint
and keep a good estimation of the fair value of the company.
