Question: How do we quantify enterprise value?

Nick LaGuire: Market cap plus debt, minority interest and preferred shares, minus cash and cash equivalents.

Allen Kaplun: and as applied to Spotify?

Nick LaGuire: It would be the same formula, would it not?

Allen Kaplun: Nick LaGuire well, the enterprise value approach works when comparing businesses in the same industry. How do you value Spotify using the enterprise value approach when they’re not quite like Pandora and their main competitors dont have streaming music as their core business?

Nick LaGuire: On an absolute basis, the formula is valid. However, it might be difficult to use, in this instance, on a relative basis.

Allen Kaplun: Nick LaGuire so how would you value the company? Its a pure enterprise value play. Would we need to go in and figure out how much it cost AAPL to build the same service?

Nick LaGuire: I haven’t looked at the company. Does it have earnings?

Allen Kaplun: Nick LaGuire no, but it has free cash flow with zero debt.

Nick LaGuire: Could you perform a DCF analysis?

Allen Kaplun: Nick LaGuire no.

Allen Kaplun: Nick LaGuire I’m telling you, they have enterprise value going for them. Thats it. Its similar to XM and Sirius

Nick LaGuire: You can’t have FCF without earnings, can you?

Allen Kaplun: Nick LaGuire you have can FCF and a net loss.

Nick LaGuire: Enterprise value is pretty meaningless on a standalone basis. It tells you what the market is willing to pay for the company, but provides very little insight into the intrinsic value of the company.

Allen Kaplun: Nick LaGuire how would we be able to value AAPL’s and AMZN’s streaming music operation?

Nick LaGuire: You would have to dig into the numbers for those individual businesses. You might be able to find some insight from an analyst report or possibly from Bloomberg, if you have access.

Allen Kaplun: Nick LaGuire thats really the key.. once you figure out how much it cost AAPL and AMZN to build out their streaming music service, you can value it better. Didn’t apple acquire streaming music companies in the past?

Joakim Arvidsson: Why not take FCF/EV yield and compare it to ANY other investment? Why the need to compare to peers?

Allen Kaplun: Joakim Arvidsson because you still won’t get the intrinsic value of the company and therefore can’t compare it to other investments.

Joakim Arvidsson: I thought you were asking about the Enterprise Value and not Intrinsic Value? They are quite different. Even with Intrinsic Value, why the need to compare to other companies? Normally you would estimate IV and compare it to the current market price, and invest if there’s a big enough margin of safety between the two (since IV is just an estimate).

Allen Kaplun: Joakim Arvidsson here’s the thing about enterprise value: calculating that alone give you nothing more than what you already see in front of you. What we really need to know is how much would it cost a competitor to replicate that same business. A good example is the Dish Network or XM Radio. As they were losing money they were gaining tremendous enterprise value that few investors recognized until it was too late.