Download: GoDaddy IPO Valuation Model
It started with me not getting selected in Deloitte which had come for summer internship. I had an exciting opportunity in risk consulting waiting for me, not to mention the remuneration associated with it. For any young guy looking to make it big in the field of Finance, it is a good step forward to say at the least. But, it wasn’t to be and I was one of those rejected in the final interview. Now, this is where life teaches us a lesson and it is important to understand the subtle difference between ‘Rejection’ and ‘Non-Selection’. The beauty of the matter is that the choice is all ours. I chose to believe in the latter and concluded that I need to keep going in search of the light at the end of tunnel and light there was and that too a shining bright ray of hope.
I didn’t sit in interview process of the companies which followed Delloite for multiple reasons, profile being one of them. Finally, Edupristine gave me opportunity to valuate GO DADDY which seemed exciting so I accepted.
Frankly speaking, no internship could have offered me better work and I was supposed to work from home. So, I was happy since my friends, most of them were working in marketing and operations, had to roam around Delhi in sultry afternoon.
I had no clue where to start. Honestly I didn’t even know where to get the data from which I came to know eventually though. I was assigned a mentor who helped me a lot.
One more good this project did was compel me to revise basic accounting concepts which had wiped out completely from my memory following the completion of the 1st term.
I started by doing basic formatting in Excel which is supposed to be similar for all sheets. Over the time I learnt lot more new things in excel which includes plethora of shortcuts.
Actually I developed knack for short cuts. Every time I had to do small thing like increasing the font, I would press ‘Alt+’ and look for the next key.
Eventually I managed to memorize lot of shortcuts which are frequently used in excel while doing modelling.
I faced lot of problems, most of them about making assumptions, but the major among all of them was matching cash in cash flow statement with the balance sheet.
I took me few days to figure out the mistake I committed while adjusting balance sheet items in the cash flow sheet.
The overall experience and a weird sense of achievement which I felt post completing the valuation was really fulfilling.
Below, I have mentioned step by step method which I followed to value GO DADDY. I hope it helps and inspires you to learn financial modelling.
Case 1- Data Collection
Since the company has registered for an IPO, its information can be retrieved from S1 form.
The figures are given in ‘000, so you may keep it like that or divide entire figures by 10^3.
All the figures which are directly taken from some source are blue coded while those which are derived are black coded.
Case 2- Understanding Business profile
Technology provider to small businesses, web design professionals and individuals, delivering simple, easy to use cloud-based products and outcome-driven, personalized Customer Care.
Operate the world’s largest domain marketplace, customers can find that unique piece of digital real estate that perfectly matches their idea.
Provide website building, hosting and security tools to help customers easily construct and protect their online presence and tackle the rapidly changing technology landscape.
Case 3- Modelling revenue and expense drivers
Identifying revenue drivers:
- Hosting & Presence
- Business Applications
Average Revenue Per Use
[x]% of domain users
Operating Expenses except depreciation & amortization can modelled as %age of total revenues.
Since no information is provided regarding addition or deletion of assets. Depreciation & Amortization can be modelled as %age of PPE.
Case 4- Modelling Net Income
Interest Expense can be modelled as %age of long term debt. Net Income can be easily calculated after adjusting income tax. Benefit from income tax is modelled as %age of PBT.
Case 5- Completing Balance Sheet
A/c receivables can be modelled as days of revenue. Similarly, A/c payable is modelled as days of operating expenses. Registry deposits and pre domain name registry fee are modelled as %age of total customers.
Total customers can be easily forecasted, once y-o-y increase in total customers is calculated.
Case 6- Modelling Cash Flow
Cash Flow can be easily calculated by adjusting values from operating, investing and financing activities.
Cash Flow from operating activity:
- Increase in liability – Out Flow of cash
- Decrease in liability – In Flow of cash
Cash Flow from investing activity:
- Increase in assets – In Flow of cash
- Decrease in assets – Out Flow of cash
Cash Flow from financing activity:
- Increase in Equity – In Flow of cash
- Decrease in Equity – Out Flow of cash
Case 7- Calculating Ratios
Revenue Mix can be calculated by taking ratio of individual revenue drivers and total revenue.
Gross Margin can be calculated by taking gross ratio with total revenue. Liquidity and Leverage ratios can be calculated easily.
Case 8- DCF Valuation
We have used discounted cash flow method for valuation. FCFE is calculated using:
[+] Depreciation, Amortization & Impairment
[-] Change in Working Capital
[-] Capital Expenditure
[-] Debt Repayment, Net
FCFE is discounted with cost of equity.
Assumptions in calculating cost of equity:
- Risk free rate is taken as the average of maximum and minimum return offered on US treasury bonds with maturity of 10 years.
- Beta is taken as the average of different values provided by different sources.
- Expected return is again taken as average of values found in magazines, newspapers, articles etc.
- Terminal growth rate is taken between the GDP growth rate of developing and developed nations. Since, their businesses come from countries like US, India.
Case 9- Sensitivity Analysis
Since we have taken assumptions in calculating cost of equity and terminal growth rate, we need to do sensitivity analysis to check the effect of variation in these two parameters on the stock price.