Are EV multiples a mini DCF....a market's view on the intrinsic value of the company?
The way I see ev/ebitda multiple for example, is a shortened mini-dcf. The EQUITY in the EV is the market's view (assumptions) on growth, capex and discount rate, all represented in a DCF. Else, how would a market value a company. The idea that DCF is an intrinsic way of valuing a company and trading multiples are not, is flawed I think. Both the DCF and trading multiples are trying to answer the same thing: i.e. what the intrinsic value of a company and thus they are both intrinsic methods but sometimes using different assumptions than your own. The thought you can value a company based just on a random multiple is fuckin insane. What justifies that trading multiple, whats behind it? my answer would be a mini dcf, a shortened version of it, reduced to a simple multiple number. At the end of the day, when you're doing a football field and comparing the ev/ebitda through different valuation methods, you're reducing your own DCF to an EV/EBITDA multiple, or other multiples.
Look at it in terms of M&A. What does an M&A professionals do?
They make markets on highly illiquid assets. In this case those assets are companies. Making markets with no benchmarks would be near impossible. So, we use the public markets as a benchmark. This is about as accurate as you can get, because the public markets are updated on a second-to-second basis, integrating all available information. If you believe that markets are even mildly efficient, this is the way to go.
This is not to say that multiples will take the place of DCF. They are generally used in tandem.
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