Help with modelling, stuck
What resources do you guys turn to when you're stuck with modelling a company? I know it's not the whole picture but modelling is still a key part of the day to day. For me currently analysing a TMT company but can't forecast DTA correctly. Created a separate NOL schedule but numbers still not adding up. Help!
I didn't know TMT investors knew the balance sheet existed
That's offensive!... and true.
Start by asking yourself a question - does this drive value? Then ask if you modeling some esoteric mechanic better than everyone else is actually alpha. More than likely modeling deferred taxes better than everyone else is going to generate zero to negative alpha since you’re wasting time on this vs attempting to find actual alpha.
You will never have anywhere near the complete information set to build a full corporate model. Certainly not when it comes to modeling something like deferred taxes. So short of talking to IR who will probably be annoyed by the question, you will likely end up making a high-level estimate at best if not skipping it entirely as most of your peers will.
Thanks for this. One follow up—how “high level” exactly is acceptable? Eg, could I just grow net DTA on B/S as % of income tax expense, DTA on CFO tracks yoy changes of the former, and income tax on I/S is just statutory/historical baseline rate of pretax earnings? Is smth that simple acceptable?
God id be so mad at you if you were my analyst
Idk, like not even projecting it? To my prior question - does it matter? My educated guess is that it doesn’t at all. You only have so much time in the week. If you spend a couple hours trying to understand bullshit tax minutia then it better pay off because that’s time you didn’t spend on things that actually drive revenue/EBITDA/CF. A huge part of this job, and finance in general, is figuring out what matters and ignoring the other stuff.
FWIW I’ve covered energy and cash taxes has actually been important recently. It’s guided to and discussed at earnings and with IR at conferences. That said, I would say that modeling cash taxes correctly has paid out maybe like twice of call it 15 quarters and 30+ names. So 0.5% of the time and maybe 3-5% moves on $5-10MM each. It’s just not something that really drives price action because it’s complex (read: opaque and hard to accurately model), 9.5/10 tracks guidance, and isn’t that impactful for more than maybe a quarter or two. I still do my simple math and I gut check the result, but unless it’s materially different than expected it’s a 5 minute exercise and on to the next thing.
I've spent time in my younger years trying to value DTAs because a lot of early stage tech companies are not yet profitable and there was discrepancy between the corporate tax rate and what they actually pay that I wanted to reconcile.
I realized quickly that it was a pointless endeavour and just to hold tax assets and liabilities constant.
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Ha ya I’m imaging some M/C/P analyst fresh out of IB or MM PE who’s never covered a company in their life. You get the joy of trying to answer the question while tactfully letting them know it doesn’t actually impact your numbers while they think they’ve uncovered something big
Realistically speaking this likely doesn't matter at all. You can probably just skip it, unlikely it makes a meaningful difference to the thesis.
Hi all, coming from a PE background, our underwriting case boils down to an irr and a moic. in public equities, is there a single metric used to drive decision making?
Is this really how people think?
Ok that was a really pithy response - sorry
But it isn't process work with 1 + 1 = 2
The reason being, stock prices are marked to the second, and that mark is an aggregate of the probability distribution of future outcomes, influenced by the news and sentiment of the day, prevailing narratives, and obviously hard data on the real outcomes. Every participant with their own view, slightly different information, etc. - we know how markets are made.
Anyways, your views are also a probability of different outcomes with their own weights. Maybe 40% confidence in bull case, 30% base, and 30% bear or whatever. Typically more nuanced than that, but you are balancing your own risk/reward framework against this.
You'll see people doing an IRR on FY3 EPS x multiple, or that discounted back to today, or a reverse DCF vs. current, or simply 20% variance to EPS = 20% upside, or xyz multiple on 2026E = PT. Lots of ways to attack the problem, but they make up the mosaic of what is the potential upside/downside you are playing for.
So the answer is you typically balance a few frameworks to build your conviction in the "alpha" potential or risk/reward potential in a stock, and then also compared to your timeline for realizing that. Many theses are realized ahead of the thesis narrative or "target" as well. Example: I see am 20% higher than street on 2027E for NVDA and my PT = 2027E x multiple, but in reality, the market can move to that framework or thinking ahead of 2027.
Can't you use some sell-side models to see how the street models whatever company you're looking at? Theoretically you shouldn't be wasting time building the actual model, maybe tweaking it to make it better for your case.
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