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How did it get a valuation of billions of dollars?

Why are companies with no profits valued at billions of dollars? Why do some startups attract significant investment while others don't? Aswad Damodaran, a finance professor and leading authority on corporate valuation, explains that the power of storytelling can boost a company's value, give meaning to numbers, and even convince skeptical investors to take risks.
This book is a bestseller in the field of valuation, explaining the benefits, challenges, and pitfalls of numbers-driven narratives, and how to ensure your story passes the test of validity.

By middle school, the world divides us into two tribes: storytellers and number crunchers (accountants, statisticians, stock analysts, etc.).
We choose our favorite habitat and stay there.
The number-cruncher tribe, which thinks primarily in numbers, is interested in classes with a lot of numbers, and as they major in number-related subjects (such as engineering, physics, or accounting) in college, they gradually lose their storytelling skills.
Conversely, the storyteller tribe resides in social sciences, honing their storytelling skills while majoring in history, literature, philosophy, psychology, and more.
Both groups fear the other and view it with suspicion.
And by the time you're old enough to be an MBA student and take my valuation class, the chasm of doubt has become so deep that it's hard to bridge.
Both tribes speak their own language and are convinced that only their tribe knows the truth and that the other tribe is wrong.

I was a number cruncher, not a storyteller.
So when I first started teaching valuation classes, it was almost entirely geared towards catering to the interests of people like me.
As I wrestled with the valuation problem, I learned a very important lesson.
A valuation without a story to back it up lacks soul and credibility, and stories are more memorable than spreadsheets.
It was awkward at first, but I started to breathe life into the valuation work with stories.
And I rediscovered the storytelling talent that I had been suppressing since middle school.
Although I am still instinctively a left-brained person, I have rediscovered some of my right-brain abilities.
This experience of trying to turn stories into numbers, or numbers into stories, is what led me to write this book.

--- p.4, from “Introduction”

It may be a bit early to start evaluating the value, but let's assume this.
Let's say I show you the valuation of Ferrari, the luxury car company that everyone dreams of.
The company is now planning an initial public offering (IPO).
The spreadsheet presents projected sales, operating profit, and cash flow in numbers.
I explain it like this.
My initial prediction is that Ferrari sales will grow by 4 percent annually over the next five years before falling back to the level of overall economic growth.
And the pre-tax operating profit margin will be 18.2 percent, and Ferrari's revenue for every euro invested will be 1.42 euros.
The storyteller tribe will probably be dizzy by now, and the number cruncher tribe will probably have a hard time remembering these numbers for long.

Well then, let's think about it another way.
I explain that Ferrari produces eye-poppingly expensive luxury cars while maintaining their rarity and generating high net profits by making them exclusive to the super-rich.
This story may be memorable, but it doesn't provide any specifics, so it tells us almost nothing about how to value Ferrari's stock.

There is a third way.
I believe that Ferrari's low sales growth rate of 4% is due to its extreme luxury.
The company explains that its high profitability and long-term stable profitability are due to its premiumization strategy.
He added that Ferrari buyers, unlike other car companies, are very wealthy and therefore not affected by economic ups and downs.
This explanation adds validity to the numbers I presented by tying the company's numbers and stories together.
And it provides a basis for discussion to create your own Ferrari story, where you will have different estimates to attribute to the valuation and different valuation results.
In conclusion, the ultimate goal of this book is to help you create your own story.

--- p.12, from “Chapter 1: The Story of Two Tribes”

We love stories.
We tell stories, and we remember with stories.
Since the beginning of recorded history, stories have been used to inform, persuade, convert, and sell.
So it's no surprise that companies are obsessed with storytelling.
In this chapter, I'll explore how storytelling became central to learning, why stories continue to exert such a powerful influence on us, and why the desire for storytelling continues to grow even in the information age.
The first half of this chapter will discuss the benefits of storytelling, while the second half will discuss the dangers of taking storytelling too far and how emotionally charged stories can lead to poor decisions.

--- p.27, from “Chapter 2: Tell the Story”

In investing, storytelling is an essential part of investment philosophy and stock recommendations.
Many investors shun numbers and data and invest in stocks that tell a story—in other words, stocks with compelling narratives.
Even analysts and investors who look at numbers often try to tell a story about the number systems they examine.
For example, in sell-side research, the analyst who creates the most compelling story about an industry and the companies within it is often the most valuable.


When it comes to legendary investment achievements, surprisingly, what we remember more is not the numbers, but the stories.
For example, one of the most frequently cited stories about Warren Buffett's investments is his investment in American Express in 1964.
American Express was embroiled in a corporate scandal after lending money to commodities trader Tino DeAngelis, who used adulterated salad oil as collateral.
American Express's stock price plummeted when the fraud was discovered.


Buffett believes the scandal has had no impact on the company's credit card business and that its stock is worth several times its current trading price.
So he invested 40 percent of his investment partnership's funds in American Express stock, and reaped handsome profits as the stock price rebounded.
Buffett's profit from his American Express investment was nearly $33 million, but it was small compared to his other investments.
But his investment in American Express is still talked about among value investors as proof that research can lead to great success.

--- p.35, from “Chapter 2: Tell the Story”

In Chapter 2, I explained how social media creates a platform for storytelling.
But what's more interesting is that social media also reveals how much we care about numbers.
We score the content of a Facebook post by the number of 'likes' and measure the impact of a tweet by the number of retweets.
And we sometimes change what we post on social media to attract more people.

--- p.75, from “Chapter 4: The Power of Numbers”

To connect stories and values, we must first understand the basics of intrinsic value assessment.
While there are many in-depth studies on this topic, it's not difficult to summarize the fundamentals of intrinsic value.
Intrinsic value refers to the value assigned to an asset based on fundamentals such as cash flow, expected growth, and risk.
The important part of intrinsic value is that it allows us to estimate the value of a particular asset without knowing what the market is pricing in other assets (although knowing that information can be helpful).
In principle, strictly speaking, the discounted cash flow model can be said to be an intrinsic value valuation model in that it evaluates the value of assets based on risk-adjusted expected cash flows.
The book value approach can also be considered an intrinsic value valuation method, as it assumes that the value of fixed and current assets estimated by the accountant is the true value of the company.
Discounted cash flow valuation estimates intrinsic value using an equation that links value to expected cash flows, which are then combined with growth estimates and a discount rate (weighted to reflect risk).

--- p.194, from “Chapter 8: From Narrative to Numbers”

The difference between a lack of storytelling and a lack of number crunching becomes most apparent when the subject matter shifts to emotional elements.
Storytellers believe that a glaring weakness of valuation models is their failure to consider corporate culture, the qualities of management and employees, and other soft factors that influence business value.
Number crunchers believe that highlighting the emotional element is a sign of superficial thinking and a red flag that a premium is being justified by word of mouth.
My position is somewhere in the middle.
Because I believe that there is truth in both sides.

Do emotional factors influence value? Absolutely! It's only natural that management's strategic thinking, employees' loyalty and expertise, and a brand name built over time influence business value.
But before you dismiss me as a storyteller, remember that corporate culture, strategic considerations, or a proud brand name don't always pay dividends for investors.
Ultimately, the point is to bridge the gap, and I believe that even the most ambiguous emotional elements can be converted into numbers.

As you can see from the valuations I've established in this chapter, qualitative strengths are key to business success for all four companies I've valued.
Uber's management team is known for its high risk-taking, aggressive opportunity-seeking, and high technical skills.
But it's precisely because of these factors that I can comfortably assume this company will conquer the ride-sharing market within the next decade.
Ferrari is one of the companies with the best brand names in the world.
It is precisely because of this brand name that Ferrari maintains its pricing power, being able to charge over $1 million per car and earning a high profit margin that ranks in the 95th percentile of the automotive industry.

--- p.211, from “Chapter 8: From Narrative to Numbers”