Valuing IPOs

How do you guys value a company on the cusp of IPO with only its prospectus? DCF – FCFE?

Traditional method. EV/EBITDA, P/Sales, P/E

usually just do it the most obvious way: if the company has positive eps/ebitda just value it the same way you would other cos in the space… fwd p/e or ev/ebitda. for your tgt multiple apply a premium or discount to publicly traded comps based on rev growth prospects and profitability. if the company is about to be profitable soon stretch it out to do 2009, 2010 fwd p/e etc. DCF is really a last resort imo. sure we have it in our models but from my experience at least that’s not the way most investors think about valuation. rarely has a buysider asked me about our dcf. sometimes we use EV/sales… but at this point it’s a toss up between that and dcf. for certain sectors maybe EV/subs etc.

This is strictly my perspective and i hope people chime in … but I think DCF is pretty much useless.

DCF is nice because it is a theoretical justification for a price, but what matters in an IPO is what comparable companies of comparable risk are fetching “at the moment,” and multiples capture this better. Long term, DCF might be useful, provided you trust your estimates of CFs and, of course, have some sensible idea of a terminal value (which usually just refers back to some kind of multiple anyway). So, although I don’t have a lot of experience actually doing this kind of thing, it seems that it would make sense just to go directly to comparables and multiples and forget about DCF for IPOs. The main thing DCF might be useful for is some kind of sanity check, just to make sure that your multiples aren’t too bubblicious, and to figure out some margin of safety if they are.

i would only use DCFs for companies with long, highly visable earnings which are not volatile.

“with long, highly visable earnings which are not volatile.” in which case P/E would be even more appropriate…

Just my 2 cents. I am borrowing this acronym from somewhere - can’t seem to recall at the moment… I.P.O. = It’s Probably Overpriced The mechanics of an IPO tend to favor companies at the expense of the public. That’s why IPO issuance plummets during periods of negative sentiment. Who wants to sell fairly valued or undervalued securities when one could easily shelve the offering for a little while and offer it. (aka when the comps are in it’s favor). I agree with Bchadwick: DCF’s are nice in theory but change the assumptions slightly and you find the model is highly sensitive to certain inputs. So be very conservative. I’d prefer to skip forcasts as they are notoriously unreliable and tackle current asset values and use comps or DCF’s as a check.

e :slight_smile: