By Dominique Jacquet

The Airbnb listing did not fail to draw attention to the difficulty of evaluating companies whose model is “disruptive”: no comparable to calculate multiples and a cash-flows forecast somewhat delicate …

Recall that the so-called DCF method consists in discounting a large amount of free cash-flows (often an infinity, terminal value included) at a discount rate called WACC which reflects the profitability offered by the markets for the same risk category.

When the business is new, the risk is difficult to assess, and any professional knows how estimating systematic risk and its evolution over time is often subjective economic reasoning.

There remain free cash flows, the formula of which essentially shows EBITDA at credit and industrial investments (the famous “Capex”) at debit, to which are added other more technical elements such as the change in WCR and tax.

Let’s focus on EBITDA and Capex.

Airbnb generated negative EBITDA of $ 230 million in the first 9 months of 2020 and invested (Capex) $ 30 million. It is obvious that 2020 is a “special” year, yet the firm announces EBITDA practically at break-even in 2019 but Capex in the order of $ 100 million. In order to justify an IPO price in the $ 50- $ 60 bracket that values ​​the firm at $ 40 billion, one must introduce particularly optimistic assumptions in terms of getting to breakeven and growth.

The market was still much more optimistic than the introducing banks because the closing price on the first day of listing was 113% above the price offered, ultimately decided at $ 68 …

And it was not an “accident” because the IPO of DoorDash had met the same fate the day before, seeing its first closing price exceed by 86% the IPO price …

Should we send assessors back to school? Or change the method?

Back to basics … An investor agrees to take a risk on the basis of an expectation of return. This comes from the dividend (which will wait a bit, these firms are only making losses…) and the increase in the value of the share. Based on this principle and adding that the value of any asset is equal to the price an investor is willing to pay, buyers anticipate a significant increase in performance to convince another investor a little later, etc.

All of this works when the analysis is relevant and the market is not experiencing a sharp crisis. However, in a period characterized by an increase in the frequency of extreme phenomena, it is possible (probable?) that a sudden event disrupts this beautiful mechanism and, while waiting for the machine to restart, the main objective will be to survive …

A company goes public to evaluate the investment of its shareholders and raise additional resources to finance its industrial ambitions. It raises funds, then consumes them, then returns to the market if it has not yet reached cash flow balance. So, if the market is declared “absent”, it can only count on its own strengths, that is to say its free cash flow, therefore its EBITDA net of Capex.

If the method of discounting free cash flows at the WACC is difficult to implement because it gives very dispersed results, the concept of free cash flow itself is very powerful and should be taught at school, because it expresses the most enviable situation for a company, liquidity, and therefore survival.