When SOTP instead of DCF?

When divisions are very different or free cash flow is negative because of heavy investment. For stable, uniform businesses a DCF is enough.

Why don’t you deduct a conglomerate discount?

Because the research is divided and a blanket discount would be false precision. If you think one is appropriate, you can apply it in the model yourself.

What is the difference to the NAV discount?

With NAV, a holding’s stakes are valued at market prices and the gap between NAV and price is measured. With SOTP you value operating divisions with multiples.

Knowledge · A group in pieces

Sum-of-the-parts (SOTP) explained simply

In a SOTP valuation a group is split into its business divisions. Each part is valued separately with a fitting multiple and the parts are added up.

At a glance

It makes sense when divisions grow or earn margins very differently (cloud vs. advertising, Starlink vs. rockets).
Each division gets the multiple of its peer group.
Then come stakes, net cash or debt, central costs and, where relevant, a conglomerate discount.
It is closely related to the NAV discount. The difference: for a holding you use market values, for SOTP multiples.

Formula

Equity value = Σ (segment metric × multiple) + stakes + net cash − discount
Value per share = equity value ÷ share count

Worked example: Alphabet, base case (as of Oct 29, 2026)

Part	Metric	Multiple	$bn	Share
Services incl. central costs	$126.1bn operating profit	16x	2,017.6	56%
Google Cloud	$44.4bn operating profit	30x	1,332.0	37%
Other Bets	–	0	0	0%
Stakes	$135.2bn book value	1x	135.2	4%
Net cash	–	–	105.2	3%
Total			3,590.0	100%

$3,590bn ÷ 12.18bn shares = $295 per share (price $283.82).
Bear / base / bull range: $208 / $295 / $377.

Alphabet: sum of the parts

Counter-example: Amazon

Amazon’s trailing free cash flow is negative (−$7.6bn) because the company invests so heavily. A DCF therefore gives only $104, the SOTP approach $224. That is why SOTP is often the better choice for groups with heavy investment.

What the number does

Cloud alone makes up 37% of the value.
Changing its multiple by ±10x moves the value by ±$36 per share ($444bn ÷ 12.18bn shares).

Alphabet: value per share at 20x, 30x and 40x for Cloud

Pitfalls

The choice of multiples is the real assumption. Cutting the cloud multiple from 30x to 20x lands at $258.
Central costs and double counting are easy to forget. At Alphabet the central costs are already deducted in the Services segment.
Conglomerate discount: Berger and Ofek found an average value discount of about 15% for diversified groups from 1986 to 1991. Later work (among others Graham/Lemmon/Wolf 2002, Villalonga 2004) attributes a large part of it to selection effects. We therefore apply no blanket discount.
The total is only reachable if the market recognises the value of the parts, for example through a spin-off or IPO.

FAQ

When SOTP instead of DCF? When divisions are very different or free cash flow is negative because of heavy investment. For stable, uniform businesses a DCF is enough.
Why don’t you deduct a conglomerate discount? Because the research is divided and a blanket discount would be false precision. If you think one is appropriate, you can apply it in the model yourself.
What is the difference to the NAV discount? With NAV, a holding’s stakes are valued at market prices and the gap between NAV and price is measured. With SOTP you value operating divisions with multiples.