The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits)

by Aswath Damodaran

Value Plays There are many reasons why young growth companies fail: Revenue growth may lag, target margins may be lower than expected, capital markets may shut down, or key people may leave. Investors can improve their odds of success by focusing on the following: Big potential market: The potential market for the company’s products and services has to be large enough to absorb high revenue growth for an extended period, without being overwhelmed. Expense tracking and controls: Young companies can become undisciplined in tracking and controlling expenses, while chasing growth. Set targets for margin improvement and view failure to meet these targets as reasons to sell. Access to capital: Capital access is critical to both growth and success. Look for firms with larger cash balances and institutional investor bases because they are better positioned. Dependence on key individuals: Young firms are often dependent upon key individuals or founders. Focus on firms that have built up a solid bench to back up key personnel. Exclusivity: Success will attract competition, often from larger companies with deep pockets. You want young firms that have products that are difficult for others to imitate, whether this exclusivity comes from patents, technology, or brand name. As a bonus, with exclusivity, success is also more likely to feed on itself, allowing a firm to enter new markets and introduce new products. In summary, you want to invest in young companies with tough-to-imitate pr...