The way you do valuations is using DCF analysis. They do some projection until a final year at which point they treat is as perpetuity with some growth rate. Here is the basic formula PV = FCF/(r-g). Where r is discount rate and g is growth rate. As you can see g is huge in the way companies are valued. For example for d=10% and FCF value of $10 million a growth rate of 1% would value the company at 111 million whearas a growth rate of 9% would value it at $1 billion. Almost 10x as much. That is why growth is so important to finance people.
This formula (the Gordon growth model), doesn't really apply here, cause the g is for perpetual growth. For example, if you plugged in FB's current growth rate, it would blow up to something ridiculously large. The rule of thumb is that it should never be larger than GDP (since that company would quickly come to dominate the national economy). Tracking inflation is safe if the company can at least raise prices to match inflation.
If you don't want to set up a full DCF, the Benjamin Graham formula gives a quick intrinsic value estimate:
V = E * (8.5 + 2g) * 1.1,
E is earnings (FCF, or a modified form like owner's earnings would work also), but here, g is the growth rate for the next 7-10 years.
This still wouldn't work for TWTR, since negative earnings always give you a negative value, so you would have to project out the next few years until twitter has positive earnings (or positive FCF), then you could use the Graham formula and discount it back to present value. But at that point you might as well just do a full DCF.
If you literally just want the technical stuff, then anything by Damodaran is good. His Valuations book is awesome, but does not qualify as "condensed / quick". You can also watch his valuation course on YouTube.
I have not read it, but if his "Little Book" is indeed a condensed version of his main book, then its a good start. I think he also gives out a PDF for free on his website.
I would advise against blindly applying DCFs, or at least making real investment decisions from blindly running one. When I first got started I looked for some grand "insert and crank" method of valuation, but now I am convinced there is no shortcut aside of thoroughly understanding a business and its financials.
While your post is technically correct in terms of how a DCF works, it is also emblematic of a pervasive misunderstanding within SV about how valuation works and especially how institutional investors (the people who control most of the money in the stock market) approach valuation.
Financial models, especially DCFs, are useful as a framework for comparing similar assets against each other -- whether it's two software companies or two oil refiners.
On the other hand, using DCFs as a tool to derive the "true" value of a company's equity is a mistake. Similarly, imputing truths about the drivers of a given company's DCF valuation -- e.g., g in the Gordon growth model -- based on the value of that company's equity in the financial markets is also a mistake.
The recent explosion (last 5 years or so) in private company valuations is more a function of a global thirst for yield than investor expectations that any given company will be producing free cash flow of a in year x or b in year z.
You project for as long as you can, but eventually you have use the growth model at the very end. Even before you get to that point you have project a growth model. So year 1 is 1.2A year 2 is 1.2^2A etc. So the growth rate is pretty important in creating valuation.
You're missing my point altogether. I'm aware of how DCFs work and you describe their mechanics accurately.
My point is that the drop in Twitter's stock price has nothing to do with DCFs and more broadly, that DCF models are useful (and used) primarily as a means of comparing similar companies rather than as a "true measure" of a company's value.
If you are interested in valuing Internet/Tech companies, look into Aswath Damodaran's blog http://aswathdamodaran.blogspot.com/?m=1 In the past he had valued AAPL, FB, Uber etc. His Investment Valuation course at NYU Stern is also available online.
