by John Swaren
| September 25, 2014
My "Real Options Valuation" blog suggested the use of parametrics in real options valuation. I’d like to offer the generalized use of our type of modeling in valuing tangible assets.
Typically, fundamental analysis evaluates the intrinsic value of securities. I won’t attempt to compete with Warren Buffet here. But it is certainly the case that a company, or portfolio of securities reflecting many companies, is based in part on the market value of its product assets and their potential for future earnings, as well as other objective and subjective considerations.
In parametric estimation, we take a top-down approach to developing models of estimating ultimate acquisition and ownership costs. In the case of the former, I’d argue that we can readily… and uniquely… estimate operating costs for companies developing and selling, say, technology-based products. Marketing can determine pricing, based on their competitive landscape analyses and market-demand for unmet needs.
We are in an excellent position to complete the forecasting of earnings (and hence, discounted cash flow) using our parametric methods to evaluate a product-system’s should/will costs. Anyone who does detailed bottoms-up budgeting for “go to market” expense, as well as production delivery, would find value in our modeling.
And again, once estimated costs are subtracted from revenue forecasts, the netted estimate of earnings and cash flows will allow for traditional market value assessment of this asset or entity. For example, your organization needs to compare economic potentials of emerging new software products. There are no balance sheets. There are no income statements. Yet.
Now your sales and marketing function has a good independent sense of revenue opportunity. So it’s left to you to estimate the costs of developing and delivering. Independent parametric estimation is the answer. No idea on sizing, either SLOC or function points? No problem.
Data-driven True Planning has years of data modeling that allow you to run application-specific calculators. In addition, you can take advantage of calibrating actual data from similar projects. Likewise, this process of valuing assets holds true for IT infrastructure products as well. Cloud computing, SAAS and ERP are all further examples of where new IT/software products are emerging… and need estimating as well as financing via valuation.
I think parametric estimating has significant value commercially in the estimation of value of future product assets, and consequently their companies and associated securities. What do you think?