Unit 2 LESSON TWO: WHAT IS THE VALUE OF A BUSINESS?

LESSON TWO: WHAT IS THE VALUE OF A BUSINESS?

By Nicholas Murja

If you were asked to buy a used car for $20,000, you'd first need to determine if the car is worth $20,000. The same goes for stocks, even if we know we want to buy shares of the company, we have to find the value before we can make the purchase. Once we know the value, we can figure out what we are willing to pay.

What's ahead

Open Ended

Time to do some research.

If you last name starts with A-i research "Initial public offering."

If you last name starts with J-R research "Market Capitalization."

If you last name starts with S-Z research "Economic Moat."

Below, write an explaination of your topic and provide and example.

One person from each group needs to share their term.

Some text here about the topic of discussion

Multiple Choice

Uses an investment bank to value a company and begin to offer shares publically.

• Initial Public Offering

• Market Capitalization

• Economic Moat

Multiple Choice

An advantage that companies possess such as lower costs that make it hard for customers to switch to another brand or for competitors to take market share.

• Initial Public Offering

• Market Capitalization

• Economic Moat

Multiple Choice

Stock price times the number of shares a company has. This represents the market value of a company

• Initial Public Offering

• Market Capitalization

• Economic Moat

Multiple Choice

Which Company is worth the most?

• Company A:

  1 million shares

  & $10 stock price

• Company B:

  10 million shares

  & $5 stock price

How long are these profits sustainable?

Question 2

How much are the profits going to grow?

Question 1

How do we find value?

Which chart would you want to see as a hypothetical investor?

Choose your chart:

Open Ended

As a hypothetical investor in Apple Which chart would you want to see and why?

Our goal when making investment decisions is to determine: "How long will this last?", "Will the company's current profits continue?" , "Will they grow?", "Will they fail?"

Choose your chart:

Steady growth of 5% each year, this is what you want to see!

This chart shows no growth and assumes Apple only sells the same amount of devices every year. Without growth the value is cut in half and you lose half your money.

Very strong growth of 15% per year for a few years but competition picks up and that cuts profits in half. Apple value plumets.

Even the best investors have been dead wrong, the future of many companies are too uncertain to predict.

​

But, there are some that we can!

​

Can you predict

the future?

​

Some companies don't have any defenses or economic moats to protect the profits of their good ideas. So they may have great profits, but they won't last.

​

​NO MOAT!

Some companies stopped innovating or never had a good idea in

the first place.

No Innovation!

But some companies are earning a profit and they have an economic moat that protects their profits. Those profits will continue until: A) the company stops innovating or B) another company breaches the moat. This is where we put our money!

This graph shows the stock prices of Amazon and Walmart in 2012. What do you notice?

Walmart v. Amazon 2012

​This is the chart from 2015-2022. What changed? Why has Amazon done so much better?

​

Walmart vs.

Amazon 2022​

Open Ended

Why did Amazon continue to grow, but Walmart stayed the same?

Hindsite is 20/20. It does us no good to know that we SHOULD have bought Amazon in 2012. We need to know what to buy today! Let's look at the fundamentals to see if there are clues that will tell which stock to buy.