1) The power of compounding -
A few have expressed their concern about the high valuations of some of my companies. Although the valuations of some of my hyper-growth businesses are high when compared to the broad market, this post will explain why I'm unfazed by these rich...
A few have expressed their concern about the high valuations of some of my companies. Although the valuations of some of my hyper-growth businesses are high when compared to the broad market, this post will explain why I'm unfazed by these rich...
2)...multiples.
Lets take a look at $WORK (the most richly valued stock I own)
Slack's current market cap is $12.4 billion and its FY 2019 revenue is expected to come in around $620 million.
So, Slack is currently trading at 20 times TTM revenue.
The analyst community...
Lets take a look at $WORK (the most richly valued stock I own)
Slack's current market cap is $12.4 billion and its FY 2019 revenue is expected to come in around $620 million.
So, Slack is currently trading at 20 times TTM revenue.
The analyst community...
3)...is expecting Slack's revenue to grow by 30%+ CAGR over the next 5 years (for reference, company grew revenue by 60%YOY in the most recent quarter).
Here is the maths -
$620 million x 1.3 x 1.3 x 1.3 x 1.3 x 1.3 = $2.3 billion in 5 yrs
So, using 30% 5-yr revenue CAGR...
Here is the maths -
$620 million x 1.3 x 1.3 x 1.3 x 1.3 x 1.3 = $2.3 billion in 5 yrs
So, using 30% 5-yr revenue CAGR...
4)...Slack's revenue will grow to $2.3 billion in 5 years (or almost a quadruple from FY 2019 revenue of $620 million)
In 5 years from now, Slack's growth rate will be much lower than its current growth rate (this is certain); so in the future, the market will probably assign..
In 5 years from now, Slack's growth rate will be much lower than its current growth rate (this is certain); so in the future, the market will probably assign..
5)...it a lower multiple to reflect the slowdown in business momentum (this is highly probable, but not certain).
Now, lets assume that the market lowers Slack's multiple from 20 times TTM revenue to 12 times TTM revenue (similar to other slower growth SaaS companies today)..
Now, lets assume that the market lowers Slack's multiple from 20 times TTM revenue to 12 times TTM revenue (similar to other slower growth SaaS companies today)..
6)...In this scenario, in 5 years from now, Slack's market cap will be 12 x its future revenue or 12 x $2.3 billion = $27.6 billion (vs. $12.4 billion today).
So, despite a massive valuation compression (from 20 times revenue to just 12 times revenue), Slack's market cap...
So, despite a massive valuation compression (from 20 times revenue to just 12 times revenue), Slack's market cap...
7)...will grow and produce a 5-yr compounded annual return of 17.35%!
In my above calculation, I've accounted for a 40% reduction in Slack's valuation which may or may not happen. Despite this, based on the above revenue growth, this company's market cap will end up growing...
In my above calculation, I've accounted for a 40% reduction in Slack's valuation which may or may not happen. Despite this, based on the above revenue growth, this company's market cap will end up growing...
8)...at a healthy clip.
The big question of course is whether this growth will materialise or not, but that risk exists with all businesses and personally, I feel more comfortable owning high growth/richly valued compounders (as opposed to shrinking, cheap companies).
The end.
The big question of course is whether this growth will materialise or not, but that risk exists with all businesses and personally, I feel more comfortable owning high growth/richly valued compounders (as opposed to shrinking, cheap companies).
The end.
