The Dark Side of Valuation
Given the many estimation issues we face when valuing growth companies, it is not surprising that the dark side of valuation manifests itself in many ways when analysts value these firms. In this section, we will consider the ways in which valuations of growth firms can be skewed by unrealistic or unreasonable assumptions about the future, first in the context of discounted cash flow valuation and then in relative valuation.
Discounted Cash Flow Valuation
The estimation issues with valuing growth companies, outlined earlier in the chapter, generate heartburn among analysts, who then look for shortcuts, often devised from their valuation experiences with more mature firms, to get to a valuation.