Customer Reviews

The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies

5 star:		(3)
4 star:		(1)
3 star:		(3)
2 star:		(0)
1 star:		(0)

 

 

The Pros:

Damodaran is a gifted teacher and in his books is able as well to explain the concepts and techniques of valuation in an understandable manner. The book serves mainly for readers who want to get a comprehensible (and to a certain degree comprehensive) overview of the topics with selected in-depth discussions and it is quite 'readable'.

The Cons:

The book is not new at all, as about 90% is a copy of his earlier book 'Investment Valuation'. The only real difference is the selection of the examples used and the financial and market data are more current compared to his other book from 1994. It seems that the marketing department of the publisher saw an opportunity to sell a 'new' book to the new class of technology investors. However, the occasional comments of which valuation topics are specific to technology companies could be summarized on a couple of pages.
The book is good for giving a comprehensible overview but does not go very much into depth.
Effectively, it's the earlier book 'Investment Valuation' recycled with a new title and new cover, still a good book but not new at all.

Although much of the organization and explanation of valuation techniques presented here repeats the presentation in Damodaran's previous books, he does two things which make this the better book than the previous books: 1) he discusses the role of "tech" companies in our economy and he selects 5 specific companies which serve as his examples in every chapter and 2) he makes reference to excel spreadsheets (available for free download on his web page) which he has prepared to allow readers to apply what they are learning immediately and with a minimum of set-up time. As tech companies play a larger and larger part in our economy, the specific quirks and issues related to the operation of tech businesses and the impact of those industry-specific issues on the valuation process become more important for us. One might argue that all companies, whether they are wine makers or processor makers, face industry-specific valuation issues which do not affect companies in other industries, and in light of that, many issues discussed here might not be relevant to the wine makers. But tech is so important to us now that we can no longer afford to use generic, non-tech specific techniques in the face of an increasingly tech-heavy stock market.

As for the reviewer who compained that Damodaran doesn't do enough work in real option theory: Damodaran says in this book exactly what needs to be said about real option theory: that it has very limited applications (which is not to say that it is not revolutionary within those limited applications) and that the push to broaden the use of real option valuation beyond its traditional applications can more often than not constitute misuse and abuse of the models. Not every investment contains options, and not all of those options have value, to paraphrase Damodaran himself. Damodaran doesn't ignore real options, of course: he calls them contingency claims (as they technically should be called) and dedicates a chapter to explaining there use and abuse. Using real options, when it comes down to it, involves building and solving partial differential equations based on stochastic processes. As any actuary or financial analyst could confirm, teaching stochastic processes presupposes a very strong math base and still would require an entire book. Damodaran did the right thing by limiting himself to a single, illustrative chapter.

The best part of this book is that thanks to Damodaran's congenial and accessible ability to write, this book can be read and prove valuable to people with a variety of needs. As an MBA student this book has been invaluable. But I even gave this book as a gift to my brother, a decidedly non-financial person, to replace his countless "How to Invest" books sitting on his bookshelf.

Excellent introduction to discounted cash flow approach to valuation. Excellent examples. But very weak on real options valuation. After recognizing that real options are mostly american, the author values them like european anyway resulting in systematic undervaluation of real options. This is a shame since much of the value of new companies come from real options. If you are already familiar with DCF valuation, then you might prefer Copeland's 'Real Options' to bring yourself up to date with the latest developments in the practice of valuation.

This is one of the most complete books on valuation in the market. The others are Valuation from Copeland and Damodaran on Valuation.

It contains concepts and technicalities, such as CFROI, PEG or how to include management options in valuation, not found in other books -though I rather that he expanded more on this-.

The only drawbacks I find in Damodaran books are the limited attention to real-world balance sheet problems one may face (ie: effects of Minority Interests in valuation) and the no-mention policy for valuing banks. In this category, Copeland's Valuation book is better. Of course, this particular book is only meant to value tech firms !!!

If you want a really in-depth valuation book, just buy it.

This is a pretty good book on the valuation of companies. At some places, it gets too tedious. For example, the author shows how to arrive at the correct discount rate used to discount cash flows to the present. It would take investors hours to calculate it, and in the end, it doesn't really matter that much. When valuating companies, I personally do not spend too much time trying to pinpoint the exact discount rate. I use 10%, and then change it to 9% and 11% to see what the valuation results are. Then, I compare them to the trading price. It is not important or even possible to value anything with 100% precision. What is important is to get an idea of whether something is undervalued. Overall, I learned quite a bit from this book.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

Do you need to understand the basic fundamentals of valuation? Then this is the book you need. This book will take you through step by step on how to value a company and the assumptions you need to make. By far, this book is much easier to read and understand than the book "Valuation," written by couple of Mckinsey consultants.

This is a fairly broad introduction to valuation using Discounted Cash Flow techniques with an emphasis on growing companies. You will need to be familiar with accounting before reading this book. There are aspects of the book I like but overall I keep getting the feeling that it's written by an academic and not a practitioner. I also don't agree with the valuation techniques employed and I don't see why something like Relative Valuation is even described since it is completely useless except for speculative purposes. The writing style is also a bit hazy at times and you have to read some sentences several times to decode them.

You may want to browse this book before buying. Maybe it'll suit you more than it did me. It appears that the entire manuscript is available on the author's webpage. Personally I prefer the books: Free Cash Flow by Georg Christy and something like Analysis for Financial Management by Robert Higgins.

PS: This review is for the 1st edition from 2001. The new edition may or may not be better.