TY's Learning Edge: Damodaran's Recent Post, Fisher Investment Guide, and "7 Powers" (1)

Damodaran - The Expectations Game

While corporate earnings reports are delivered once a quarter, the work of anticipating what these reports will contain happens continuously. Key factors in forming these expectations include:

1. The company’s history and news.

2. Other analysts’ estimates.

3. Macro news.

Stock prices can fluctuate leading up to earnings season, presenting opportunities to exploit a positive earnings surprise.

Nvidia Projections

In a similar framework, projections for companies like Nvidia can be analyzed based on market scale and competitive positioning.

Hamilton Helmer and 7 Powers

Hamilton Helmer taught his strategic approach at Stanford for a decade and distilled it into 7 Powers: The Foundations of Business Strategy, named one of Bloomberg’s Best Business Books of 2017. This framework also underpins the investment strategy of Strategy Capital, leveraging these 7 Powers to evaluate long-term business performance.

Helmer's concept of Power refers to rare characteristics that materially improve cash flow while inhibiting competitive arbitrage. The formula for calculating the Net Present Value (NPV) of free cash flow is expressed as:

NPV=M0⋅g⋅sNPV = M_0 \cdot g \cdot sNPV=M0​⋅g⋅s

Where:

• M0M_0M0​ is the initial market size.

• ggg is the growth rate.

• sss is the market share.

This formula represents a business's potential value as a product of market scale and power. It separates strategy into two dimensions:

1. Statics (Being There): What makes a business like Intel’s microprocessor division durably valuable?

2. Dynamics (Getting There): What developments led to this advantageous position?

Power is the set of conditions that create the potential for persistent differential returns. For Intel, operational excellence under Andy Grove was the norm, but it was their Power that made the difference in value.

Potential Value

Potential value is determined by market scale and Power. For Intel, both memories and microprocessors had large-scale markets, but Power in the microprocessor business led to a vastly superior value outcome. Operational excellence is crucial to realize this potential.