We launched an updated version of our Comparison Analysis tools last week.

Here is a quick look at some of the new features:

1. We calculate an implied share price based on the weighted average of the selected comparable companies, so you can immediately see if the company is under or overvalued on this basis.
2. We use an EV/EBITDA comparison by default (or EV/Revenue for companies with negative earnings).  Subscribers can choose between these and seven other valuation metrics.
3. We choose a set of comparable companies, based on broad industry codes.  Subscribers can swap any of the companies we select for any of the nearly 9,000 other companies in the Valuecruncher database.
4. We show the weighted average value for the selected valuation metric.  Subscribers can update this value and see how this impacts the implied share price and the buy/sell recommendation.

This new tool is shown by default when you search for a company or click through from the industry or market links.

Register today to unlock Valuecruncher and get unlimited access.

Some examples: IBM & YHOO

Valuecruncher places an implied share price of $143.66 on IBM – this is 10.4% above the current share price.  This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Oracle (ORCL), Hewlett-Packard (HPQ) and Accenture (ACN). The current IBM share price gives an EV/EBITDA multiple of 8.14x – this is in the middle of the comparator set. Some of these businesses have a larger services offering (IBM, HPQ and ACN) – but we see IBM being undervalued.  Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of IBM.

Valuecruncher places an implied share price of $12.02 on Yahoo (YHOO) – this is 22.7% below the current share price. This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Google (GOOG), Time Warner (TWX) and IAC (IACI). Yahoo currently has an EV/EBITDA multiple above that of Google – a dollar of Yahoo EBITDA is being valued by the market more highly than a dollar of Google EBITDA. Yahoo looks overvalued at these levels. Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of Yahoo.

What is EV/EBITDA?

Enterprise Value (EV) is simply the market capitalization plus net debt (borrowings less cash). We use EV to capture the impact of debt and cash on a companies balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

The very smart Zack Miller asked that question on his blog. I could not help but respond – what is a 500+ word comment amongst friends. Here is that comment – with a few added links.

Why hasn’t Yahoo Finance changed in 10 years?

Yahoo Finance is a really interesting case. A key disruptor in Web1.0 then nothing.

You have seen my post.

Here is my quick take:

1. It isn’t that big a business for Yahoo (I think Yahoo Finance is $315 million a year in revenues – see above post for assumptions). That is approximately 5% of Yahoo’s (YHOO) total revenues of $6.46 billion LFY. Yahoo Finance is a big player in the free on-line finance space – but finance isn’t that big a part of Yahoo. Thomson Reuters had $13 billion in revenues LFY and Bloomberg had $6.1 billion in revenues in 2008. We over-estimate Yahoo Finance’s place in the financial data universe – guilty myself.

2. Business model – advertising based (primarily brokers and financial products). If Yahoo Finance innovates – they are likely going after the people that are generating their current revenues. Should they / could they disrupt the market further – probably. But I bet that there is concern about harming the current Yahoo Finance revenue base. Yahoo Finance is a solid earner as it is – why change things (possibly an internal view).

3. The platform is dated – Yahoo Finance is several base-platform generations older than Google Finance (for example) or Reuters free site. That makes keeping the platform stable probably a bigger job than we appreciate. Stability (and extending what they have) vs Innovation – stability appears the winner.

What might change the dynamic?

1. XBRL may be a game-changer. Uncoupling financial information from the existing raw data providers may generate a wave of innovation. New players (without the legacy issues) create base information platforms (not as good as Yahoo Finance initially) and quickly iterate with additional services (i.e. valuation) and disrupt the current on-line players (Yahoo Finance) and wider financial data players (Reuters, Bloomberg, etc). I believe Yahoo Finance keeps Reuters and Bloomberg awake at night today – that scenario may be even scarier for those players.

2. Thomson Reuters, Bloomberg, Morningstar and the other traditional financial data providers (very worried someone will make their multi-billion dollar industry a multi-hundred million industry) are playing really smart. The free Reuters site is amazing. From the outside it looks like these guys see the threat and are positioning to compete with free offerings. The traditional players may yet win the day – but I believe there will be, at a minimum, a value transfer from these players to the consumer.

Yahoo Finance – I think they may be the big loser caught in this cross-fire. Google Finance could be a player – but Google Finance is less of a contributor to Google than Yahoo Finance is to Yahoo. Umair Haque pushed for Google to do the job but Google has enough on their plate addressing the threat Facebook poses to their core business to worry about finance. I do really like Google Domestic Trends – it shows what could be done.

We want to see innovation in this space – and there has not been as much as some of us want. There maybe a step change coming – and that would be very cool.

Zack Miller has a new book out soon – Tradestream. It is on my must-read list.

To those of us with an interest in on-line financial information – Yahoo Finance has a pretty special place in our affections. While early on-line services (like Prodigy) provided some financial information – Yahoo Finance was the first service that provided useful “good enough” financial information for free. Good enough that traders and investment bankers use the service along-side paid offerings like Reuters and Bloomberg (I know because I was one of these guys). Why? Because it is available on a work/home PC for free (and not hidden on a paid Reuters or Bloomberg terminal) and the base information needed to feed into models and analysis is accurate.

So what is the possible future of Yahoo Finance?

This is our view of the world:

We have developed a range of scenarios for the market based on Free vs Paid and Individual vs Collaborative approaches.

Here we are focusing on the Super Commons vs Walled Garden scenarios. The We Live In Public and Rock Stars are in play (and we are watching them) – but we see the current battle being Free vs Paid.

Where is Yahoo Finance today?

The Yahoo Finance business model is primarily to license financial information then serve that information up for free and sell advertisers the audience. It is pretty simple – but you are hostage to the data providers (see the bottom of this page).

So how much reach and revenue does Yahoo Finance have? A number of analysts have tried to pull some numbers together – here is our take (using those analyst numbers as a guide):

We think that Yahoo Finance does around 17.5 million unique visitors a month in the US and 8.75 million unique visitors a month from the rest of the world (half the US number – guess at our end) – for a total of 26.25 million unique visitors per month. Based on dated statistics of the average of time on the site (just under 30 minutes per unique visitor a month) and page view numbers – we estimate an average of 50 page views per month for each unique visitor. That means a total of 1.3 billion page views per month for Yahoo Finance. We note the $9 effective CPM rate in one piece of analysis ($6 x 1.5 ads per page). However, we think that looks low – we would expect a RPM (revenue per 1,000 impressions) of around $20. That gives monthly revenues for Yahoo Finance of $26.25 million – annual revenues of $315 million. If the RPM number is only $10 that would mean annual revenues of $157.5 million or if it is $30 that means annual revenues of $472.5 million – our guess is between these numbers. That is smaller revenue than I expected – and the data costs will limit the margins.

What about the competition?

The competition are the other free financial information website – AOL Money and Finance, MSN Money and Google Finance. But also the traditional financial information providers such as Thomson Reuters and Bloomberg. Both Reuters and Bloomberg have a range of revenue streams – but their core business is selling sophisticated timely information to financial institutions. The larger opportunity for Yahoo Finance is taking on these traditional financial information providers.

To put our estimates of Yahoo Finance’s revenues in context – Thomson Reuters ($TRI) had revenues of $13.0 billion last year (enterprise value (EV) / revenue multiple of 3.0x) and Bloomberg had reported 2008 revenues of $6.1 billion. Prior to the merger with Thomson – Reuters had 2007 revenues of GBP2.6 billion ($3.85 billion at current exchange rates). Yahoo Finance’s revenues are tiny in comparison to the traditional financial information providers.

Reuters and Bloomberg would state that their services are deeper, richer and more relevant for traders and investment bankers than the free offerings of the on-line financial information sites (such as Yahoo Finance). That view would be correct today – but also potentially dangerous.  We think that these companies recognize the danger posed by the free sites. For example:

• Bloomberg hiring a former Yahoo executive to run Bloomberg.com. Bloomberg are also trialling a new retail investor friendly look for the site. Bloomberg also scooped up traditional business-weekly BusinessWeek. Creating some interesting internal dynamics.
• Reuters launched a new free website – that is, in our opinion, the best “free” offering in the market. Reuters are also launching a video offering – which has been described as a financial YouTube.  The video offering is aimed currently at subscribers – but it could easily become a free ad-supported model.
• Morningstar acquiring financial blog Footnoted.org.

We think these are just a number of examples of the traditional financial information providers preparing for a potential war with the free financial information sites. These moves position the traditional financial information providers brands much more in the retail space.

Should the traditional financial information providers should be scared?

The traditional financial information providers are worried that on-line finance sites could do to them what Craigslist did to newspaper classifieds. Take a multi-billion dollar industry and make it a multi-hundred million dollar industry – with the benefits flowing to consumers of financial information. Financial information market disruption.

What we mean by “disruption” is the Clayton Christensen disruptive innovation framework. This describes the process where a product or service starts as a simple offering at the bottom of a market (but with an advantage – examples: price, size, etc) then improves moving up-market, eventually displacing the traditional incumbents in the industry (based on being “good enough” but retaining the original advantage). Existing examples of disruption in the finance space include: index funds and discount brokers.

Our take on the potential on-line financial information market disruption:

The traditional financial information providers (Reuters, Bloomberg, etc) have an offering that is targeted at traders and corporate finance professionals. The services are subscription based and provide a lot of information – historic financials, forecast numbers, analysis tools, etc. The on-line finance sites have less information – but have quickly (on the basis of being free) attracted a sizable audience. If these free sites can improve their offerings (add sustaining innovations) – they will become attractive to more demanding customers. This means some customers stop purchasing expensive financial information products and move to the free offering. More move as the free offering improves and it meets their requirements.

How could that happen?

First - XBRL. XBRL stands for eXtensible Business Reporting Language. XBRL is an open-source standard for communicating financial information. The Securities and Exchange Commission (SEC) is mandating XBRL for US companies (over a three-year roll-out) – which means it is coming for the rest of the world as well. That means that base financial information – the type traditional financial information providers charge for – will become virtually free. This will allow on-line finance players to break free of the current relationships with traditional financial information providers (and allow more innovation). It won’t take all the traditional players revenues – but it will take away an historic advantage and even the playing field.

Second - innovation from on-line financial sites (especially the major portals like Yahoo Finance). By adding tools and functionality (combined with XBRL data) Yahoo Finance can take market share from the traditional financial information providers. As Yahoo Finance’s functionality improves – current subscribers will migrate to the free service (when the functionality is “good enough”). Yahoo Finance can keep the advertising model – but good ad-targeting can extract more from users of valuation tools than those simply scanning the current Key Statistics page.  This analysis focuses on Yahoo Finance – but it could be for any of the major on-line finance portals. Do any have the ambition to do it?

There is a big opportunity for the on-line financial sites (such as Yahoo Finance) to disrupt the traditional financial information providers. I hope they can – because it would democratize finance. students and retail investors could have the same information and tools as traders and investment bankers at Wall Street firms. That would be a good thing.

Will it happen?

It does appear that the traditional financial information providers are investing more in the threat than the potential disruptors. This means that the traditional players may yet win the market. In Yahoo Finance’s case there may also be issues with management focus (peanut butter) and potentially a dated technology platform. We think there are still some powerful forces in the disruptors favor. We hope Yahoo Finance (or someone) does step up.

Mark Clare, Valuecruncher CEO

Disclosure: No Positions

Full disclosure – we have had a couple of conversations with Yahoo Finance about Valuecruncher. Nothing about big picture strategy – these are our thoughts and estimates alone.

On-line retailer Amazon.com ($AMZN) closed yesterday at an all time high of US$135.91. $AMZN is up 218% in the last 12 months – better than Apple ($AAPL) at 122%, Google ($GOOG) at 88% or the broad NASDAQ at 41% [visual]. Time to have a look at a superstar performance.

Valuecruncher Interactive Analysts Report For Amazon ($AMZN)

We have the comparator group set as Wal-Mart ($WMT), Google ($GOOG), eBay ($EBAY) and Yahoo ($YHOO). You can change these peer companies on the site. For example you could add:

1. Overstocked.com ($OSTK) – Interactive Analyst Report For $OSTK
2. Barnes & Noble ($BKS) – Interactive Analyst Report For $BKS
3. Netflix ($NFLX) – Interactive Analyst Report For $NFLX

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$99.04 for $AMZN – 27.1% below the current share price. Using a DCF calculation we see $AMZN overvalued. But how about $AMZN compared to a peer group?

Comparison Analysis

I kept the first three peer group companies as $WMT, $GOOG, $EBAY and changed $YHOO to $BKS.  I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AMZN is trading at 2.8x ($AMZN is being valued at 2.8x last year’s revenues). This compares to $WMT at 0.6x, $GOOG at 7.8x, $EBAY at 3.4x and $BKS at 0.2x. $AMZN’s profit margins (at the EBITDA line) were 6.2% of revenues last year.  A dollar of $AMZN revenues is being valued more than 4.5 times a dollar of $WMT revenues – despite that dollar of revenues producing less profit (on an EBITDA basis) than the $WMT revenues.  A dollar of $AMZN revenues is being valued just less (15%) than a dollar of $EBAY revenues – but $EBAY produces over five times the profit (on an EBITDA basis) on each dollar of revenues as $AMZN does ($AMZN EBITDA margin 6.2% vs 33.3% for $EBAY).  Wow – based on previous performance $AMZN is trading a a massive premium.

Now $AMZN does have a range of additional services like their AWS offering that big future growth are expected from. But that is some significant future growth that is being valued in.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AMZN is trading at 47.0x ($AMZN is being valued at47.0x last year’s profit at the EBITDA line). A dollar of $AMZN EBITDA is worth more than double a dollar of $GOOG EBITDA ($GOOG has EBITDA margins of 37.3% vs $AMZN’s 6.2%).  $GOOG makes over 6 times the profit on each dollar of revenue that $AMZN does – but each dollar $AMZN’s profits are worth over double the comparable $GOOG profits.

This appears crazy.

Summary

Based on our DCF valuation – $AMZN looks significantly overvalued. Looking at some comparators – the market is valuing $AMZN very highly compared to some peers. We believe if you are investing in $AMZN at the current price – you are paying a full price which includes significant future growth.  We like $AMZN as a company – but not at these valuation levels.

Disclosure: no positions.

We have been participants and observers of the on-line finance  space for a period of time now. As part of that we regularly examine our view of the competitive landscape. We have decided to share some of our views on where the very broad industry may be headed. This isn’t company specific – very much the high-level perspective.

Where We Are Today

We view the on-line finance space in three broad areas: Information, Analysis and Execution.

Pre-1995 this whole area was dominated by brokerage firms with full-service offerings. They had the information, did the analysis and the executed the trades. Since 1995 that has changed pretty significantly.

Information – background operational and financial information. The main players in this space are now the large finance portals (Yahoo, AOL, MSN, Google, etc). They built and extended these offerings in the Web 1.0 and 2.0 days. The business model is primarily advertising – free to consumers. It should also be noted that there is still a paid market for detailed and timely financial information (Reuters, Bloomberg, Capital IQ, etc).

Analysis – what does the information mean? Should I buy a particular stock? What is this stock worth? Full-service brokers still compile research notes and reports for clients – but this space has begun to be disrupted. This disruption is coming from a number of areas:

Qualitative – primarily finance blogs. These take two main forms: user-generated content aggregators (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Community Sites – where retail investors look to communities of investors for advice on where to invest. Examples: The Motley Fool, Wikinvest, Covestor, KaChing, etc.

Niche Tool Providers – primarily quantitative-based tools. For example Valuecruncher.

Execution – the actual buying and selling of stocks. The discount brokers have come to dominate this space (i.e. Charles Schwab, ETrade, etc). They disrupted full-service brokers with simple flat-rate commission structures starting in the Web 1.0 days.

That is a high-level view of where we are today. What might happen next?

We completed a scenario planning exercise based on the frameworks developed by people like Peter Schwartz.

We started with an analysis of trends and uncertainties. A trend is something that we feel certain is occurring. An uncertainty is something that could still go either way.

Trends

1. Execution becomes a commodity – executing trades will continue as a low-cost business. There will be some geographic-based regulatory moats – but no ability to generate abnormal returns. Other parties could enter this market (i.e. portals).
2. Death of traditional equity research – the current model is too expensive and producing research reports that are complex and hard for retail investors to consume. Traditional equity research will head the way of newspapers. Equity research is important but the delivery methods must change. There will be a space at the top-end for high-quality  research (that clients will pay for) but only a niche.
3. Investor knowledge continues to improve – the level of general investor knowledge continues to improve but there still remains a significant gap between the average retail investor and the corporate finance professional.
4. Financial blogs continue to be influential – high-quality analysis continues from blogs. There are two broad models – aggregating content (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Uncertainties

1. Individual VS Collaborative – how will retail investors choose to research investment decisions? Individual analysis – retail investors (with improving education) complete their own analysis on where to invest – both qualitative and quantitative. Collaborative – retail investors look to communities of investors for advice on where to invest – track record is vital.
2. Free VS Paid – financial information has proven to be an isolated area on-line where paid models have worked (i.e. WSJ). Moving forward – will retail investors be prepared to pay for financial information or will free win out?

We then construct a basic scenario matrix. These scenarios are not meant to reflect concrete versions of possible future states but rather to illustrate the potential impact of the identified trends and uncertainties. There will be components of all of the scenarios in the future – this analysis is intended to emphasize trends and uncertainties. We look at the winners in each scenario and where the portals come out.

Scenarios

1. We Live In Public – Retail investors seek advice from communities of other investors. Track record is vital – this is open to abuse. Retail investors won’t pay for this advice. Community owners seek models to monetize the audience not the content – none is initially obvious beyond advertising. Winners – The Motley Fool, StockTwits. Portals – business as usual providing (mostly) raw data.
2. Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing. Portals – business as usual providing (mostly) raw data.
3. Super Commons – Retail investors value analysis and tools but are not willing to directly pay. There is a move from traditional on-line financial information providers (i.e. Capital IQ) to low-cost/no-cost providers (i.e. financial portals). Retail investors and corporate finance professionals use the same tools. New tools are added (i.e. Google Domestic Trends). Pay-walls come down – financial blogs are at their most influential. Winners – Portals and financial blogs
4. Walled Garden – Retail investors value analysis and tools. The financial blogs continue to exert influence. However the pay-wall remains at the WSJ and on-line information providers (Reuters, Capital IQ) have a valuable and growing business. Winners – Reuters, Bloomberg, Capital IQ. Portals – Opportunity to launch a low-cost disruption strategy aimed at on-line information providers (a good enough offering to tempt [for example] Capital IQ’s clients).
   

Implications

• Discount Brokers – Challenged across all scenarios. Must follow a low-cost strategy and only add services if that will increase trades (and commissions).
• Financial Blogs – Winners across all scenarios (a role to play in all scenarios). Two distinct approaches – aggregating content VS traditional journalism on the web. We would expect one to come to the forefront (our bet would be on aggregating content – but it is too early to say).
• Community Sites – Winners in the “We Live In Public” and “Rock Stars” scenarios. Significant opportunity if community is the way that people choose to make investment decisions. A business model has proven to be a challenge to date for players like the Motley Fool (“We Live In Public” scenario). It is more obvious if investors will pay to be part of the community (“Rock Stars” scenario) – this is currently unproven however.
• Paid Finance Services – Business as usual in the “Walled Garden” scenario and challenged across all other scenarios. Even in the “Walled Garden” scenario there is the potential for the paid financial services to be disrupted (low-cost disruption) by the portals offering extended services (i.e. Google Domestic Trends). Currently users of paid services also use the free portal services (Yahoo Finance and Google Finance). There are limited options to defend this. Paid services do provide the data used by the finance portals. Reuters are also moving into the free space.
• On-Line Finance Portals – Winners across all other scenarios. In the “We Live In Public” and “Rock Stars” scenarios – it is closest to business as usual. These players are the ones with the ability to acquire or build community sites. Investors that are part of communities still require basic financial information and tools. In the “Super Commons” and “Walled Garden” scenarios there are big opportunities. Both require adding analysis tools. Partnering with financial blogs is key. Adding analysis tools is an arms race between the different finance portals.

This is one view of the potential future. Tell us what you think.

Valuecruncher Future Of On-Line Finance Summary (Four-page PDF summary).

Last week a Global Equities Research analyst Trip Chowdhry put out a research note laying out his argument for Google ($GOOG) posting negative revenue growth in the current 2008 year. Chowdhry’s analysis (and we have not seen the original full research note) has $GOOG posting revenues of US$15.71 billion in 2008 (5% below actual 2007 revenues of US$16.94 billion), US$15.23 billion in 2009 (3% below his 2008 projection) and US$14.57 billion in 2010 (4% below his 2009 projection). This analysis was picked up by a range of commentators that we really respect. These included analyst’s like Barron’s Eric Savitz, Silicon Alley Insider and Ashkan Karbasfrooshan. The only problem is that the analysis is deeply flawed.

At Valuecruncher we believe that top-down analysis can lead to flawed conclusions. Current trends can be mistakenly extrapolated out. We believe that you need to work from the bottom up. This appears to be a case of top-down analysis gone wrong.

Why?

Chowdhry’s 2008 revenue number appears based on currently deteriorating marcro conditions – remember 2008 revenues of US$15.71 billion. However, through three quarters of 2008 $GOOG has reported US$16.09 billion of revenues (through three quarters). $GOOG already has reported 2008 revenues above Chowdhry’s projection (through three quarters). Unless $GOOG announces negative Q4 revenues it is not going to be posting revenues for the 2008 financial year of US$15.71 billion.

So what do we think about $GOOG’s future revenues and the implications for valuation?

Valuecruncher valuation model of $GOOG with interactive assumptions

Valuecruncher produces a valuation of US$350.60 for $GOOG. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 11.0% above the current share price of US$315.76.

Assumptions

• Revenue: Reuters aggregates 26 analysts covering $GOOG and the mean estimates of 2008 and 2009 revenues are US$22.4 billion and US$27.9 billion respectively. For our analysis we have used US$21.5 billion in 2008, US$24.75 billion in 2009 and US$29.0 billion in 2010. Citi analyst Mark Mahaney has some assumptions around revenues that we are broadly in agreement with. Assuming Q4 revenues are in line with Q3 then 2008 revenues come in at US$21.635 billion.
• Profitability: We have used an EBITDA margin of 40.0% to 2010. Reuters has $GOOG‘s EBITD margin at 36.4% last year and an average of 36.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.75 billion in 2008 then US$3.0 billion per annum moving forward.
• Discount Rate: 11.0%.
• Terminal Growth Rate: 5.5%. In our assumptions we have 2009/10 revenue growth at 17.2% – we have assumed that growth eventually slows to a 4.0% long-term stable growth rate.

Our analysis incorporates the cash on the $GOOG balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $GOOG we looked at a two peer companies – Microsoft ($MSFT) and Yahoo ($YHOO). We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $GOOG and the peer set.

We have used the last financial year (LFY) as the base set of metrics. Of the peer group $YHOO is the closest direct competitor. But $YHOO has had a number of recent struggles and their LFY performance against $GOOG is not pretty. $MSFT’s numbers are an interesting comparison. $MSFT shows how far $GOOG still has to go from a financial perspective. $MSFT has over 3.6x the revenues of $GOOG (on a LFY basis). $MSFT’s financial performance is comparable to $GOOG. The market is currently valuing the revenues, profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses. That is an interesting observation – but to properly understand the implications you need to do the bottom-up analysis for each (probably using a discounted cash flow model).

Play with our assumptions – what does your analysis say? Our model is interactive – you can change any of our assumptions.

Disclosure: None

At Valuecruncher we have looked at Apple ($AAPL) twice over the last six-months. In June with the $AAPL share price at US$186.10 we produced a valuation of US$146.70. Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98. We are now in early-December and $AAPL has continued to head south – with the market generally. $AAPL is now trading at US$94.00 – just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective – and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.

Valuecruncher valuation model of $AAPL with interactive assumptions

Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.

Assumptions

• Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
• Discount Rate: 11.0%. In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% – we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

Our analysis incorporates the cash on the $AAPL balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis.  For $AAPL we looked at a range of broad peers.  We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash).  Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.

We have used the last financial year (LFY) as the base set of metrics.  Of the peer group $EBAY and $YHOO had rough LFY performance.  The other numbers are interesting.  The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF).  Remove the cash and you can have the business for 7.0x last years FCF – no growth assumed.  Wow – that looks cheap.

Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x.  That is still pretty resonable compared to the peer set.

Play with our assumptions – what does your analysis say?

Disclosure: None

$YHOO has had a horror run since rebuffing Microsoft’s ($MSFT) takeover offer at US$31 a share.  Today $YHOO closed at US$12.86 – just above 40% of the $MSFT offer (from 31 January 2008).

Valuecruncher valuation model of $YHOO with interactive assumptions

Valuecruncher produces a valuation of US$17.62 for $YHOO.  This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price.  This valuation is 37% above the current share price of US$12.86.  This valuation of $YHOO focuses on the core business – we have ignored the investments $YHOO holds in Alibaba, Yahoo Japan and G-Market.

Assumptions

Revenue: Reuters aggregates 25 analysts covering $YHOO and these analysts have mean estimates of 2008 and 2009 revenues of US$5.69 and US$6.42 billion respectively.  For our analysis we have used US$5.50 billion in 2008, US$6.15 billion in 2009 and US$6.75 billion in 2010.

Profitability: We have used an EBITDA margin of 33% flat to 2010.

Capital Expenditure: We have assumed capital expenditures of US$700 million in 2008, US$800 million in 2009 and 2010 and then US$750 million beyond that.

Discount Rate: 11.0%.

Terminal Growth Rate: 4.5%.

Our analysis incorporates the cash the $YHOO balance sheet – Valuecruncher calculates a net debt number.

Disclosure: None

Microsoft (MSFT) is in an interesting place at the moment – which is only in part to losing Bill Gates from day-today management. It created one of the dominant global businesses of the late 20^th century but has struggled to move beyond the core products that drove this success. The Client (Windows), Server and Tools (enterprise solutions) and MBD (Office) divisions drive 83% of revenues and over 100% of operating profits (the On-line Services and Entertainment divisions are still operating at a loss). Microsoft has spent a lot of money and resources (especially senior management focus) on the aborted (maybe) attempt to acquire Yahoo (YHOO). We agree with the analysis that the pursuit of Yahoo is an attempt to compete with Google (GOOG) in what has become one of the dominant global businesses of the early 21^st century (on-line advertising driven by search). The Microsoft acquisition of Powerset is a further example of this strategy of aiming to compete directly with Google.

At Valuecruncher we are not convinced by this strategy of competing with Google – we are not alone. We completely respect Microsoft’s previous successes in following into and then dominating markets. But in the on-line advertising and search market we see some of the same network effects that suggest a “winner takes all” competitive situation. At Valuecruncher we can see a situation where Google’s current dominance is eroded – but not because of a head-to-head battle with either Yahoo or Microsoft (or a potential combination). At Valuecruncher we believe that Microsoft should be looking beyond the current competitive situation to the next big profit pool. Hockey great Wayne Gretzky when asked about why he was successful is credited with the quote “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be”. Easily said we recognise, but that is our view of where Microsoft should be directing their strategic efforts – not competing head-to-head with Google in a market their competitor dominates.

Any potential acquisition of all, or part, of the Yahoo business clouds any current valuation discussion of Microsoft. Some influential Microsoft insiders have suggested in a piece of high-level analysis that 1% of the global search market is worth US$1 billion in market capitalisation. Microsoft’s potential acquisition of Yahoo valued their share of the search market at more than that – US$47 billion for approximately 20% market share. What about the core Microsoft business? What if we ignore the potential Yahoo scenarios – what is the core Microsoft (MSFT) business worth?

The core Microsoft business is reasonably easy to value – if you exclude growth options. The business is growing well (if not at the levels of ten years ago) with robust margins. There is capital expenditure required to achieve the revenues and profitability. There is strong competitive positioning around these core products but with credible low-end competitors that have the potential to disrupt (i.e. Google Docs). The current business will change as technology develops – but as the current dominant player, Microsoft is well positioned to respond to competitive threats and to potentially lead innovation. At Valuecruncher we are not sure that Microsoft should be investing heavily in the on-line advertising and search market – they should be aiming beyond it.

MSFT Valuation

Microsoft grew revenues from US$36.8 billion in 2004 to US$51.1 billion in 2007 – an 11.5% compound annual growth rate. Our assumptions of revenues for the next three years are US$60.0 billion in 2008 growing to US$74.0 billion in 2010 – a 13.1% compound annual growth rate. We have projected EBITDA margins to be flat at 40%. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 10.4% dropping to a 4% stable growth rate by year 10. We used a terminal capital expenditure number of US$3.0 billion. We have used a WACC (discount rate) of 10.5%. Both the terminal growth rate and WACC have a material impact on the valuation.

Valuecruncher Valuation MSFT

Our analysis incorporates the cash on the Microsoft balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$33.01 which is 20% above the current share price of US$26.03. The market appears to be placing a negative value on the noise around an acquisition of all or part of Yahoo. Focusing on the harvesting the core business and innovating (by making small bets) beyond that core appears to be the highest value strategy for Microsoft.

Based on our analysis the core business looks undervalued. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

At Valuecruncher we are keen watchers of Amazon.com (AMZN). As The Economist magazine pointed out last month – of the three pre-2000 internet giants (eBay and Yahoo are the others) it is AMZN that is currently thriving. We decided to put AMZN through the Valuecruncher on-line valuation tool.

AMZN Valuation

Our assumptions of revenues for the next three years are US$19.5 billion in 2008 increasing to US$29.5 billion in 2010. We have projected EBITDA margins increasing from 7% in 2008 to 8% in 2010.

We have used a terminal growth rate of 5%. Our view is that AMZN’s growth beyond 2010 will slow – but there is a distance to go yet. Our numbers project 2009 to 2010 revenue growth of 23%. This assumption has a significant impact on the valuation. If you believe AMZN has better future prospects – this will positively impact the valuation.

We have used a WACC (discount rate) of 10.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate).

We used a terminal capital expenditure number of US$350 million. In our opinion capital expenditure should stabilize around this number.

AMZN Valuation

Our analysis incorporates the cash and debt on the AMZN balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$59.00 which is 19.5% below the current share price of US$72.00.

Our valuation incorporates a projection of growth for AMZN in the future. We recognise that AMZN has a range of potentially valuable growth options (especially their Web Services platform). Currently it is very difficult to determine the precise value of these growth options – we have made a broad attempt with our growth projections. However, it appears that these options are being factored into the current share price at a level beyond what we are projecting.

Based on our analysis, AMZN shares look expensive. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.