Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. Download the latest version of my annual equity risk premium update by clicking hereand the latest version of my annual country risk update by clicking here. The second, writing, includes links to almost everything I have written and continue to write, starting with my books and extending to my practitioner papers (on equity risk premiums, cash flows and other things valuation-related). In the graph below, I look at the year-to-year movements in the value premium, i.e. I will start by noting that this crisis has played out in markets in three acts, captured in the graph below where I look at the S&P 500 and the NASDAQ, since the start of this year: The year began auspiciously for US equities, as stocks built on positive performance in 2019 (when it was up more than 30%) and continued to rise. The quick recovery in equity markets has led some to believe that the market has ignored the crisis, but that is not true. The equity risk premium, or the expected return stocks will provide over government bonds sits at above 6% versus an average of 3.2%, according to data from Aswath Damodaran , professor of corporate finance and valuation at … In order to calculate the equity risk premium for Croatia, one would, according to Damodaran, have to add an additional country risk premium to the premium for the mature market. gcse.async = true; Note that winner stocks continue to win, in both time periods examined, in the first twelve months after the portfolios are created, though those excess returns fade in the months thereafter. My country risk premiums also get updated midyear. After all, the ride sharing companies have doubled or even tripled the size of the car service business in the last decade, using this template. The hotel business is both large and diverse, composed of hotels that range the spectrum from luxury to budget. In the last post, I noted the strong backing for value investing for much of the last century, where a combination of investing success stories and numbers that back those stories allowed it to acquire its lead position among investment philosophies. In this post, I will argue that there are good reasons for Airbnb's IPO timing, and make my first attempt at valuing this latest entrant into public markets. Oil, in spite of its comeback in the last few months, is still down more than 30% from pre-crisis levels. Note that cancellations exceeded bookings in March and April, at the height of the global shutdown, but have come back surprisingly well in the months after. The online versions of these classes can be found here and NYU is offering certificate versions here. The picture below shows equity risk premiums, by country, at the start of 2020: uValue is available at the iTunes store. There is a debate to be had about whether markets have over adjusted to the possibility of a vaccine and the economy reopening, and to address that question, I decided to value the S&P 500 again; I did value it on June 1, 2020 and found it to be close to fairly valued. Listed below are the SPIVA measures for 2005-2019 for value managers in all different market cap classes (large, mid-sized, small): Put simply, most value fund managers have had trouble beating the value indices, net of fees. In fact, most value investors would argue that the while you may start with these stocks, the real payoff to value investing comes in from the additional analysis that you do, whether it be in bringing in other quantitative screens (following up on Ben Graham) and qualitative ones (good management, moats). There is ample room for disagreement on Airbnb’s value, since there are plausible combinations of revenue growth and margins that deliver very different equity values. Damodaran assumes the risk premium for a mature equity market at 5.23% (as of July 1, 2020). While the company has been able to hit new milestones of growth each year, there are two challenges that it has faced along the way, that need to be incorporated into any valuation you attach to the company today. Given how much trouble Airbnb has had in the experiences business, I think Airbnb’s estimate of $1.4 trillion for that business is more fictional than even aspirational. In particular, looking back at the data on value versus growth and correlating with other variables, there are two fundamentals that seem to be correlated with whether value or growth investing emerges the winner. First, this crisis has played out very differently in different parts of the world, as you can see below, where I break down the market capitalizations of all publicly traded companies, by region, on February 14, 2020 and on November 1, 2020, with a table showing the percentage changes over the period: The markets that are showing the most residual damage are. The Price-Value Feedback Loop: A Look at GME and AMC! Since some of the premium can also be explained by its presence in the insurance business, I compared the price to book for Berkshire to that of general insurance companies listed and traded in the United States. NYU’s Damodaran says the S&P 500 is probably fairly valued at 2,900 to 3,000 based on projected earnings, interest rates, ... June 15, 2020… Since I have my estimated  value for Airbnb at $36 billion, I will go first, using the valuation results, by decile, that come from my simulation: The Sharing Economy come home: The IPO of Airbnb! I also have classes specifically tailored to an online audience on valuation, corporate finance and investment philosophies. It should come as no surprise that Airbnb believes that its total addressable market is much bigger than the hotel business. If Airbnb had broached the idea of a public offering in March and April, where the numbers were not just dire but potential catastrophic, it is likely that they would have been laughed out of the market. Why would a company that derives its value from short term rentals by people who travel want to go public, when a out-of-control virus is causing its business to shut down? (COVID ERP computed with 15% earnings drop in 2020 + 80% recovery by 2025+ Lower % returned in cash flows), Downloadable datasets (For more data, go here), Downloadable spreadsheets (For more spreadsheets, go here). Defined thus, the evidence that value investing works has always been weaker than just looking at the top lines, though the strength of the evidence varies depending upon the strand of value investing examined. These are risk premiums estimates for other markets based upon the country ratings assigned by Moodys. The first is the growth rate in gross bookings and the resulting expected dollar value in 2031, with value increasing with expected gross bookings. To get a more realistic pricing, I apply the multiples to Airbnb’s expected values for these metrics in 2025, and then discounting the future values back to today. Equity risk premiums are a central component of every risk and return model in finance and are a key input into estimating costs of equity and capital in both corporate finance and valuation. More than seven months later, there is still much that we still do not know about COVID, as it continues to wreak havoc on global economies and businesses. I have never made the pilgrimage to the Berkshire Hathaway meetings, but I did visit Omaha, around the time of the annual meeting, a few years ago, to talk to some of the true believers who had made the trek. In the graph below, I look at the trend lines in Airbnb’s pricing, based upon VC assessments: : To price Airbnb, relative to publicly traded companies, I have computed pricing multiples for hotel and booking companies in the table below: Applying any of these multiples to Airbnb’s current operating metrics (revenues, EBITDA or net income) will yield valuations that are too low, because the company is still growing and finessing its business model. Check under data for downloads and links, as well as archived data from prior years. Download (updated 1/1/21) . A Viral Market Update VIII: Value vs Growth, Active vs Passive, Small Cap vs Large! I have been told that my website is ugly, and I apologize for its clunky look and feel. gcse.src = (document.location.protocol == 'https:' ? To rediscover itself, value investing needs to get over its discomfort with uncertainty and be more willing to define value broadly, to include not just countable and physical assets in place but also investments in intangible and growth assets. In the picture below, I look at the Airbnb business model, both in its original form (which still holds for hosts renting their own houses or apartments) and professional hosts (who own multiple units or even operate small hotels), a model it introduced recently and is still transitioning into: In both versions of the model, Airbnb's revenues come from fees collected on rentals, with both the host and the guest paying in the individual host version, but only the host paying in the professional host version. There are some who believe that the conventional hotel market understates the potential market for a sharing economy company like Airbnb, since it can increase the supply of rental units without major new investment, and perhaps induce new entrants into the business. Measurement of the equity risk premium Aswath Damodaran 107 ¨The equity risk premium is the premium that investors demand for investing in an average risk investment, relative to the riskfreerate. In its prospectus, driven partially by its past success, and partly by the need to justify a large market cap, Airbnb has expanded its estimate of market potential to $3.4 trillion, as evidenced in this excerpt from the prospectus: The conventional hotel business is an asset-heavy business, with a significant real estate component to its value, and while some hotel companies have stayed with that model, others have moved on to a more capital-light model, where the real estate is owned by a separate entity (both in terms of ownership and control) and the hotel companies operates primarily as an operator. Given that much of Europe is going into lockdown, and that there is no vaccine in sight, this may seem premature, but I have a feeling that there will be other uncertainties that will vie for market attention over the coming weeks, especially as the US election results play out in legal and legislative arenas. While the concept was heavily promoted, it has been slow to take off, with only $10 million in sales in 2017, but Airbnb has not given up, hiring Catherine Powell, a Disney theme park executive in 2020, to revamp the business. 'https:' : 'http:') +