Top 4 Ways to Value Communication Services Stocks | Summary and Q&A

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March 3, 2021
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Learn to Invest - Investors Grow
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Top 4 Ways to Value Communication Services Stocks

TL;DR

Learn how to value stocks in the communication services sector using four popular methods: price to earnings ratio, discounted free cash flow, enterprise value to EBITDA, and sum of the parts valuation.

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Key Insights

  • 🧑‍🏭 Valuing stocks in the communication services sector requires considering different factors and methods due to the diverse nature of companies within the sector.
  • 🥳 The P/E ratio is a commonly used method for valuing large, well-established companies with steady earnings.
  • 🥶 Discounted free cash flow is a preferred method for valuing larger, stable companies like Disney, AT&T, or Verizon.
  • 💗 Enterprise value to EBITDA and enterprise value to revenue are alternative methods suitable for younger, faster-growing companies that may not have positive earnings.
  • 🥳 The sum of the parts valuation method involves valuing individual business segments independently and accounting for the conglomerate discount.
  • 💁 The choice of valuation method depends on the company's financial information, stability, and growth potential.
  • 🥳 A reasonable margin of safety should be considered when using the sum of the parts valuation method to account for the conglomerate discount.

Transcript

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Questions & Answers

Q: What is the price to earnings ratio and how is it calculated?

The price to earnings ratio (P/E ratio) is calculated by dividing the current price per share by the earnings per share (EPS). It helps determine how much investors are paying for each dollar of earnings generated by the company.

Q: Why might the P/E ratio be unreliable for certain companies?

The P/E ratio may not be suitable for companies with unstable or negative earnings, as it was evident in the case of Disney during the COVID-19 pandemic. External factors can significantly impact earnings and render the P/E ratio ineffective.

Q: How does discounted free cash flow differ from the P/E ratio as a valuation method?

Discounted free cash flow focuses on the cash flow a company generates and projects it into the future. It is a preferred method for valuing companies like Disney, AT&T, or Verizon, as their cash flow tends to be more stable. It considers the present value of future cash flows, which is less affected by short-term profitability.

Q: What other valuation methods are suitable for younger, faster-growing companies?

Enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) is a suitable method for smaller, high-growth companies that may not yet be profitable. Enterprise value to revenue can be used as a last resort if EBITDA is negative, as revenue is unlikely to be negative.

Summary & Key Takeaways

  • This video explores various ways to value stocks in the communication services sector, which includes companies like Alphabet, Facebook, Disney, Netflix, AT&T, and Verizon.

  • The four valuation methods discussed are the price to earnings ratio, discounted free cash flow, enterprise value to EBITDA, and sum of the parts valuation.

  • The suitability of each method depends on factors such as company size, stability, and growth potential.

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