USE OF NON-TRADITIONAL VALUATION METRICS

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK

company limited by guarantee, and forms part of the international BDO network of independent member firms.

USE OF NON-TRADITIONAL

VALUATION METRICS

February 6, 2020

2

CPE and Support

CPE Participation Requirements ‒ To receive CPE credit for this webcast:

You’ll need to actively participate throughout the program.

Be responsive to at least 75 percent of the participation pop-ups.

Please refer to the CPE & Support Handout in the Handouts section for more information

about group participation and CPE certificates.

Q&A:

Submit all questions using the Q&A feature on the lower right corner of the screen. At the

end of the presentation, the presenter(s) will review and answer all questions submitted.

Technical Support:

If you should have technical issues, please contact LearnLive:

Click on the Live Chat icon under the Support tab, OR call: 1-888-228-4088

3

With you today

ANTHONY ALFONSOPrincipal, Valuation & Business Analytics

Corporate Finance Co-Leader

602-293-2358

[email protected]

4

AGENDA

5

Agenda

Traditional Valuation Metrics

Should We Reconsider?

Non-Traditional Valuation Metrics

e-Commerce

Cryptocurrency

Summary

Questions & Conclusion

6

TRADITIONAL VALUATION METRICS

7


Income Approach

Discounted cash flow / capitalization of earnings

• Matching discount rate with cash flow

Market Approach

Guideline public company

• Minority transactions

Guideline transactions

• Majority transaction (financial vs. strategic buyers)

Cost Approach

Cost to recreate

Balance sheet analysis

8


Market Approach

Invested capital multiples

• Revenues

• EBITDA

• EBIT

Equity multiples

• Net income

• Book value

9

SHOULD WE RECONSIDER?

10


Cold feet from the late 1990s?

Is cash flow king?

Preoccupation with the “network theory,” which states the value of a network

increased exponentially as the series of nodes (computers hosting the network)

increased

Newer terms

• Click through rates

• Eyeballs on screen

Losing money was the mark of success of a dot.com

11


The world is changing, investors should reconsider traditional metrics

At the very least, consider non-traditional metrics

We have moved, but not fully transitioned, to a digital economy

• “Physical” vs. “digital” metrics

• Tangible assets (booked) vs. users (not booked, absent of a transaction)

• Price to book vs. monthly/daily active users

Balance sheets have become largely intangible

• In 1975, 17 percent of the S&P balance sheets were intangible assets

• In 2015, 87 percent of the S&P balance sheets were intangible assets

• Clearly balance sheet components are changing

• Magnitude could be larger if internally generated intangible assets were valued

12


1975 1985 1995 2005 2015 2020

17

32

68

8087

???

83

68

32

2013

Component Of S&P 500 Market Value

Intangbile Tangible

Source: Ocean Tomo. LLC

13

NON-TRADITIONAL VALUATION METRICSe-Commerce / Internet

14

Non-Traditional Valuation Metricse-Commerce / Internet

e-Commerce / internet companies have unique valuation metrics

Monthly or daily unique visitors

• Does not necessary calibrate to profit, but indicates broad reach and potential

Customer conversion rate

• Number of signups / unique visitors (daily or monthly)

Bounce rate

• Number of visitors who clicked back or closed browsers / number of site visitors

Monthly recurring revenue

• Users on a subscription plan

Contribution margin (after marketing) per order

• (Revenue – direct variable costs – after marketing) / number of orders

15


e-Commerce / internet companies have unique valuation metrics (cont.)

Customer acquisition costs

• Marketing expense / number of new customers

Lifetime value

• Contribution margin after marketing / churn rate

Lifetime value / customer acquisition cost ratio

• A derivative to the two above metrics

• Measures value related to costs

Payback

• Customer acquisition cost / contribution margin after marketing

• Number of orders to payback the customer acquisition cost

16



Viral coefficient

• (Number of existing customers X number of invitations sent per user X conversion

rate) / number of existing customers

• Degree of exponential growth a company experiences by number of referrals sent

per user, the conversion rate of those users, and the total number of current users

17



Other metrics

• Average order value

• Monthly average users

• Average revenue per user

• Monthly run rate / revenue run rate

• Churn rate

• Burn rate

Use of these metrics and the comparability of the subject company

peers help select a reasonable revenue multiple

18

NON-TRADITIONAL VALUATION METRICSCryptocurrency

19

Non-Traditional Valuation MetricsCryptocurrency

Cryptocurrency has valuation metrics that parallel traditional methods

Cost of production

• Adam Hayes’ “cost of production model for bitcoin”

• Cost of producing or mining a cryptoasset may provide an indicator of its lower

bound value

• Assumes no prudent buyer would pay more for a cryptoasset than the cost to

construct a substitute of equal desirability and utility

• Assumes miners will continue to produce only as long as the variable cost of

production is less than or equal to the market price of the mined coin

• The cost of production approach, therefore, seeks to estimate the cost to produce

(or mine) on a per coin basis

20



(cont.)

Equation of exchange

• Chris Burniske “cryptoasset valuations”, frequently applied to utility tokens

• Resembles a traditional discounted cash flow, with one fundamental distinction

• Since utility tokens do not generate cash flow, equation of exchange theorizes that

the value a token holder derives from ownership is correlated with the size of the

economy the token is expected to support and in which the token holder will

participate, dubbed current utility value

o Step 1: Estimate the CUV in each year of the forecast period (requires

consideration price, quantity, and velocity)

o Step 2: Forecast of token supply; and,

o Step 3: Selection and application of an appropriate discount rate

21



(cont.)

Network value to transactions

• Willy Wo “Introducing NVT ratio (bitcoin’s PE ratio), use it to detect bubbles”

• Focuses on daily transaction volume

• A comparison of how much the network is being valued to how much the network is

being used, similar to a price/earnings ratio

• The components of the NVT ratio are as follows:

o The numerator, the cryptoasset’s network value, the total market value of all

coins or tokens in circulation

o The denominator, the cryptoasset’s on-chain transaction volumes, expressed in

fiat currency. Daily transaction volume is used as a proxy for earnings and

represents the value flowing through the network on a given day.

22

SUMMARY

23

Summary

Popularity Does Not Equal Profit

Many Companies Are Too Speculative

Sound Business Models Are Essential

Basic Business Fundamentals Cannot Be Ignored

Correlation Is Key

24

QUESTIONS AND CONCLUSION

25

Questions?

ANTHONY ALFONSO

Principal, Valuation & Business Analytics

Corporate Finance Co-Leader

602-293-2358

[email protected]

26

THANK YOU!

27

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and

advisory services to a wide range of publicly traded and privately held companies. For more than 100

years, BDO has provided quality service through the active involvement of experienced and committed

professionals. The firm serves clients through more than 65 offices and over 700 independent alliance

firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves

multi-national clients through a global network of more than 88,000 people working out of nearly 1,600

offices across 167 countries and territories.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited,

a UK company limited by guarantee, and forms part of the international BDO network of independent

member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For

more information please visit: www.bdo.com.

© 2020 BDO USA, LLP. All rights reserved. Material discussed is meant to provide general information and

should not be acted on without professional advice tailored to your needs.

© 2020 BDO USA, LLP. All rights reserved.

USE OF NON-TRADITIONAL VALUATION METRICS

Documents