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Happy Saturday, future bankers!

Hope that everyone is having a great weekend!

Today we’re going to be delving into the ins and outs of valuation multiples, discussing more best practices when responding to behavioral questions, and getting educated on Elon Musk’s $55 billion pay package that was ousted by a Delaware court.

🚀 Let’s get into it.

🔢 Technical Question

“What types of companies typically have the highest EV/Revenue multiples, and why?”

When answering this question, you’re going to want to showcase your understanding of valuation metrics and factors influencing them. Here's how to structure your response:

1. Start with identifying high EV/Revenue companies:

• Mention industries known for high multiples, like technology, healthcare, and certain consumer discretionary sectors. Briefly mention specific examples like leading software companies or fast-growing biotech firms.

2. Explain the drivers of high multiples:

Alex Hormozi, quite possibly the internet’s favorite uber-successful entrepreneur, recently tweeted about valuations. Although his tweet was specifically geared towards entrepreneurs looking to exit, the principles remain the same for valuations—even ones for large, public companies.

Essentially, the more certain the future revenues are, and the less effort that needs to be put forth in order to gain those future revenues, the more valuable the company will be. Some other factors affecting multiples and company valuations are listed below:

• Growth potential: Companies with high expected future revenue growth attract higher valuations, justifying a premium on current revenue. Explain how these companies might reinvest heavily in R&D or expansion, potentially leading to exponential growth.

• Recurring revenue models: Companies with predictable and recurring revenue streams, like subscriptions or software-as-a-service (SaaS), are valued more highly because of their stable cash flow generation.

• Market leadership and competitive advantage: Strong brands, intellectual property, or dominant market positions can justify higher multiples due to reduced competition and pricing power. Warren Buffett often refers to this concept as having a “moat.”

• Profitability and margins: While less relevant for high-growth companies, healthy profitability and high margins indicate efficient operations and potential for future cash flow generation.

3. Nuance your answer:

• Mention that while these are general trends, each company should be evaluated individually based on specific factors like its business model, stage of growth, competitive landscape, and overall risk profile.

• Briefly acknowledge other valuation metrics like EV/EBITDA or P/E that might be more relevant in certain cases.

4. Example response:

"Companies with high growth potential, particularly in technology, healthcare, or innovative consumer discretionary sectors, often have the highest EV/Revenue multiples. This is because investors are willing to pay a premium for their anticipated future revenue streams, driven by factors like recurring revenue models, strong brand recognition, or dominant market positions with competitive advantages. However, it's crucial to consider each company's individual characteristics and other valuation metrics like profitability and competitive landscape for a comprehensive assessment."

🗣 Behavioral Question

"Have you invested in any stocks? If so, describe your investment thesis behind the last stock you purchased?"

Initially, this may sound like a technical question. And to a certain degree, it is. However, when a question like this is often asked in an interview, the interviewer is actually trying to gain an understanding of your behavior and decision-making.

For example, you can learn a lot about a person if the last investment that they made was purchasing GameStop during the meme stock fiasco. You can infer that they are highly tolerant to risk and may omit fundamental analysis from their investing philosophy. Their investing strategy may be fueled more by FOMO, and less by the characteristics of a quality investment.

The key to answering this question is being able to explain a clear thesis that led you to making a recent investment. In the context of investing, a thesis is a statement of reasoning as to why you believe a specific asset will yield a good return. Furthermore, a thesis should clearly state a timeline for the return to be achieved.

Even if you haven’t made a recent investment, take a moment to explain about a public company that you’ve been following recently, and describe why you think they could make a good investment.

Here’s an example of a response that you could use to respond to this interview question:

“A recent investment I made was in [Company X]. I conducted extensive research on [Company X] in the [Industry] sector. My interest stemmed from the growing demand for [Industry trend] and [Company X]'s unique technology in that space. They boast a strong market share, a recurring revenue model, and a track record of consistent innovation. While the current valuation reflects some near-term headwinds, I believe their long-term growth potential is underpriced. I used discounted cash flow analysis and comparable company multiples to support my valuation, and I'm comfortable with the downside risks by diversifying my portfolio and monitoring key metrics closely. I believe that within the next year the company will be fairly priced by the market.”

🗞 Industry News

Elon’s $55 billion Pay Package Gets Cut 💰

A Delaware judge ruled against Elon Musk's $56 billion Tesla pay package, calling it unfair to shareholders. This decision throws the largest pay package in corporate history into question and could force Tesla to overhaul its governance structure.

The judge criticized the Tesla board for failing to properly oversee Musk and negotiate a fair compensation plan. The ruling comes as Tesla faces slowing growth and Musk seeks more control over the company. Investors are now calling for Tesla to replace multiple board members and renegotiate Musk's compensation with stricter terms.

This decision could have broader implications for CEO compensation and corporate governance, particularly in the tech industry.

Read more about this story below.