Motley Fool Money Fool School: Finding Value Drivers
Nov 4, 2023
Patrick Badolato, an Associate Professor of Instruction at the University of Texas at Austin McCombs School of Business, shares his expertise on business valuation. He delves into the drivers of true value versus passing trends, emphasizing the misleading nature of growth rates. The discussion highlights the importance of free cash flow and earnings in assessing profitability, using examples like Peloton and Costco. Badolato also critiques Sweetgreen's automation strategies and explores how AI impacts emerging business models, particularly in education with companies like Chegg.
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Focus on the How, Not Just the What
- Focus on the process of value creation, not just the final numbers like free cash flow or EBIT.
- Understand how a business generates revenue and maintains operating profitability.
Intangibles Drive Revenue and Margin
- Intangibles like brand recognition and moats should manifest in higher revenue and margins.
- Strong brands can charge more and achieve better profitability than competitors.
CAGR: A Cautionary Tale
- Don't rely solely on CAGR for valuation; it's influenced by starting and ending points.
- Consider the drivers of growth, not just the growth rate itself.