Summary of How did Goldman Sachs determine the Intrinsic Value of Twitter?

00:00:00 - 00:20:00

In the YouTube video titled "How did Goldman Sachs determine the Intrinsic Value of Twitter?", Goldman Sachs used various methods to calculate Twitter's intrinsic value, including the illustrated future value, discounted cash flow, precedent transactions, and selected comparables. The investment bank evaluated Elon Musk's offer to buy Twitter through a Schedule 14A proxy statement and provided an oral and written opinion to the Twitter board, stating that the offer price was fair from a financial point of view. Goldman Sachs used the Capital Asset Pricing Model (CAPM) to determine the discount rate, which was estimated to be 11.4%, but some analysts argue that it could be higher given the current low-interest-rate environment. The final value is a range of 45.5 to 60.1, depending on the year's EV to EBITDA, which is discounted separately. Goldman Sachs also used the Discounted Cash Flow (DCF) analysis, precedent analysis, and the EV to EBITDA ratio to evaluate Twitter's value. The DCF analysis resulted in a range of 31.39 to 60.9, and Goldman Sachs applied an EV to EBITDA multiple of 28.2 to Twitter, resulting in a valuation range of $46 to $60. The speaker encourages viewers to join his six-week online valuation masterclass to learn how to value companies like Twitter.

• 00:00:00 In this section of the Valuation Masterclass case study, Andrew Stotz discusses how Goldman Sachs determined the intrinsic value of Twitter based on Elon Musk's offer to buy the company. Goldman Sachs evaluated Musk's offer through a Schedule 14A proxy statement, which contained details about the transaction. The investment bank provided an oral and written opinion to the Twitter board, stating that the offer price of $54.20 cash per share was fair from a financial point of view. Goldman Sachs used various methods to calculate the fair value of Twitter, including the illustrated future value, discounted cash flow, precedent transactions, and selected comparables. They forecasted the future implied enterprise value of Twitter using a range of enterprise values to one-year forward EBITDA estimates, multiples of 15 to 17.5 times. After adding cash and equity investments to the enterprise value and subtracting debt, they derived the final equity value.
• 00:05:00 In this section of the YouTube video, Goldman Sachs' approach to determining the intrinsic value of Twitter is explained. The investment bank calculated the value of the overall company by adding Twitter's estimated cash and cash equivalents, equity investments, and subtracting its total debt. They then added back the cash and discounted the equity value to December 21st or 31st, 2021, using an illustrative discount rate of 11.4%. The low discount rate reflects an estimate of Twitter's cost of equity, derived using the Capital Asset Pricing Model (CAPM), which considers the company's beta, the risk-free rate of the overall US market, and the equity risk premium. However, some analysts argue that the discount rate could be higher than 11.4, given the current low-interest-rate environment and the stock market boom. The final value is a range of 45.5 to 60.1, depending on the year's EV to EBITDA, which is discounted separately. Goldman Sachs used the EV to EBITDA multiple instead of the Price-to-Earnings ratio (PE) because Twitter was losing money and not doing well, making the EV to EBITDA more suitable for valuing the company.
• 00:10:00 In this section of the YouTube video titled "How did Goldman Sachs determine the Intrinsic Value of Twitter?", the speaker discusses the determination of discount rates for valuing Twitter using the Capital Asset Pricing Model (CAPM). He mentions that during a period of low interest rates, Goldman Sachs may have used a lower discount rate, but with expectations of rising interest rates, the discount rate could be higher. The speaker also touches upon the equity risk premium and suggests a level of 13 for Twitter. Moving on to the Discounted Cash Flow (DCF) analysis, Goldman Sachs forecasted free cash flows and determined an exit multiple for the terminal value, with a cost of capital ranging from 10 to 12 percent. The speaker notes that this number could be high due to the assumption that Twitter will have more debt in the future. The terminal growth rate of 5.6 to 9 percent is considered high, and the speaker suggests it may be overestimating the value. The DCF analysis resulted in a range of illustrative enterprise values for Twitter, which included the addition of cash and equity investments and subtraction of debt, resulting in a range of 31.39 to 60.9. The speaker invites viewers to join his six-week online valuation masterclass to learn how to value companies like Twitter.
• 00:15:00 In this section of the YouTube video titled "How did Goldman Sachs determine the Intrinsic Value of Twitter?", the speaker discusses the third method used by Goldman Sachs in their valuation analysis, which is precedent analysis. Goldman Sachs identified similar past transactions to determine the appropriate EV to EBITDA multiple for Twitter. The multiples ranged from 21.5 to 50 times, with most transactions occurring between 2011 and 2021. The speaker then answers a question about choosing the terminal growth rate and explains that it should be considered as if it is to infinity, with the economy's growth rate being a factor. Goldman Sachs applied an EV to EBITDA multiple of 28.2 to Twitter, resulting in a valuation range of $46 to $60 based on their analysis. The speaker also mentions the use of comparables, with Alphabet, Meta, Pinterest, and Snap being the closest peers for Twitter. However, Snap has a much higher multiple due to its high EV relative to EBITDA.
• 00:20:00 In this section of the YouTube video titled "How did Goldman Sachs determine the Intrinsic Value of Twitter?", the speaker discusses the use of the EV to EBITDA ratio in evaluating Twitter's value. He notes that Twitter's high EV to EBITDA ratio of 62.8 is not usable for valuation purposes. Instead, he suggests looking at companies like Alphabet (Google) with high returns on equity and invested capital as a comparison. Based on consensus estimates, Twitter is valued at a multiple of 20 to 22 times, making it relatively expensive compared to peers. The speaker then shares his personal valuation of Twitter, encouraging viewers to check out his previous video or subscribe to his "Evaluation Masterclass" for more information. The conversation also touches on Elon Musk's offer to buy Twitter and the speaker's perspective as a shareholder. If the offer was at the original price, he would accept it, but recent events may have driven down the price further.