How to Value a Tech Company: $RDVT Excel Valuation Masterclass
This tutorial provides a practical, step-by-step walkthrough for valuing a listed company, using Red Violet as a live case study.
The session focuses more on the methodology of valuation than finding an exact, ‘perfect’ price, though the resulting figures proved remarkably accurate compared to the market.
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1. The Core Valuation Methodology
The tutorial utilizes a Discounted Cash Flow (DCF) approach, projecting a company’s performance five years into the future to determine its present value.
* Projection Period: The model projects cash flows through 2030.
* Historical Context: Data from 2019 to the present is used to understand past trends and “normalize” numbers for future projections.
* Terminal Value: This accounts for the company’s value beyond the five-year window, calculated by pushing the final projected cash flow into perpetuity using a growth rate.
* Key Inputs: The instructor emphasizes five critical financial metrics that define 90% of the valuation work: Revenue, EBIT, Operating Cash Flow, Working Capital, and Net Debt.
2. Key Assumptions and Adjustments
Valuation is heavily dependent on specific assumptions that must be adjusted based on the company’s risk profile and management guidance.
* WACC (Weighted Average Cost of Capital): Used as the discount rate for future money. A standard 10% was used for this exercise, though 15% is common for smaller microcaps.
* Growth Rate (G): A terminal growth rate of 2% was applied as a standard for perpetual growth.
* Dilution: For tech companies like Red Violet, it is vital to account for share dilution from options and warrants. The model used a projected share count (e.g., 16 million) rather than just the current count to remain realistic.
* CAPEX vs. Intangibles: Because Red Violet is a tech company with few physical assets, the instructor used “other investing activities” as a proxy for CAPEX to better reflect software development needs.
3. Data Sourcing and “Checking Your Work”
The tutorial highlights the importance of data integrity when moving from raw numbers to a model.
* Filing Aggregators: Tools like Ticker or Bloomberg are used to quickly pull quarterly data, though the instructor warns against using FactSet.
* Manual Verification: Even when using aggregators, one must manually check yearly figures against official company filings to ensure accuracy.
* Color Coding: A professional model uses specific colors to maintain clarity: Blue for manual inputs, Black for formulas, and Green for data linked from other tabs.
4. Understanding the Business Landscape
Beyond the spreadsheet, a “thorough evaluation” requires understanding why the numbers look the way they do.
* Business Model: Red Violet is a cybersecurity and data analytics firm that creates “digital personas” to help lenders assess creditworthiness and criminal risk.
* Scalability: Tech valuations often rely on the transition from early-stage unprofitability to high-margin scalability as the company grows.
* Competitive Moat: Investors must consider how protected a company is against incumbents, new players, and emerging technologies like AI.
Hope you enjoy!
- Alejandro Yela — Principal Advisor, Equity Focus FIL and CEO, Hermit Ventures Ltd
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