Meituan IPO Comes With a Tasty Valuation Section: Markets Link: https://www.wsj.
ID: 2619085 • Letter: M
Question
Meituan IPO Comes With a Tasty Valuation
Section: Markets
Link: https://www.wsj.com/articles/meituan-ipo-comes-with-a-tasty-valuation-1529926172
Summary: An up-and-coming Chinese tech company, Meituan, is expected to have a $60 billion initial public offer at some point later this year. Just 8 months ago, Meituan was valued only at $30 billion. The company has an app-based business model that delivers food, books travel, and promotes businesses through coupons for China. Although Meituan's app already has over 310 million users, the company lost over $640 million last year alone and is operating on slim profit margins in an industry that is relatively labor-intensive.
I need help answering the followingQuestions please:
1)As a prospective investor, what information would you need to determine if the IPO price was fair?
2)What are the major differences between the free cash flow valuation model and the dividend valuation model and their application?
3)Do you believe that Meituan is overvalued at an IPO of $60 billion? Or at $30 billion?
Explanation / Answer
Answer to 1)
To know whether a company has a fair IPO depends on the demand. A strong demand for the company will lead to higher stock price. Another valuation criterion is the IPO valuation may be linked to valuation multiples being assigned to the competitors. The IPO valuation also depends on company’s future growth projections. Apart from this it would also be better to go through the financial disclosures of the company. Other qualitative factors include companies that promote new & exciting technology will be given multibillion dollar valuations.
Answer to 2)
Free cash flow is a method of business valuation in which business value equals the present value of its free cash flow. It involves projecting free cash flows into future & then discounting them at the appropriate cost of capital. There are two approaches for this the first involves discounting projected free cash flow to firm at WACC & the second involves discounting future free cash flow to equity at the required return of equity to find the value of the business equity.
If dividends grow at constant rate, the value of share of stock is the present value of a growing cash flow. Let D0 indicate this period’s dividend. If dividends grow at constant rate g, the present value of common stock is the present value of all future dividends which in the unique case of dividends growing at constant rate g – becomes what is referred to as dividend valuation model.
P0 = D0(1 + g)
R – g
= D1
R – g
Answer to 3)
Meituan is considered to be overvalued at $60 billion only. As recently only it was valued at $30 billion. Though the company has variety of businesses in its cap, it has suffered a lot of losses & is operating on a slim profit margin. Hence $60 billion can be considered as over valuation for the company.