Thread by @jpr007

HOW TO INVEST IN STOCKS

1. Let us start with the principle that a stock will ultimately be valued based on its earnings, regardless of how it is priced today

So Future Value = Future Net Income x Future P/E Multiple / Future Number of Shares

It is that simple

2. For a stock to deliver you a 15% return based on its fundamentals, it has to grow its earnings at 15% or more over the investment period

- once its earnings growth slows below 15% per year its discounted present value will naturally decline

3. Normally its Net Income growth must be driven by its Revenue growth

- so this means that you must look for stocks whose Revenues are growing more than +15% per year and which are expected to continue to do so for as many years as possible

4. This chart is the result of my analysis of the Automobile Industry

It shows my expectations for Tesla's future unit volume growth

You can find out how I estimated this curve by reading my papers on the subject in the JPR007 Library

5. I chose to use this unit growth as the proxy for my 15% top-line growth rate

Now look closely at the numbers for each year

The year-on-year growth rates are very high in the early years

6. But gradually those growth rates slow down due to the scale of the company getting bigger and the new BEV marketplace gradually becoming more saturated or mature

As shown by the Penetration S-Curve

7. And if you calculate the growth rates for each year your will find that the period from 2031 to 2032 is the first time that the unit growth rate starts to fall below 15%

So this tells us that 2031 should be our reference year for calculating the Future Value

8. Which is what I have done here

There is no point in using an earlier year, because profits should be still growing faster than the Discount Rate, which means the Present Value is still getting bigger

9. And there is no point in using a later year, because theoretically the Present Value will start to decline from its peak level

10. Of course when we actually get to 2031 there may be new factors at that time which continue to drive the growth rate at a higher level

- but we can deal with those factors when we know more about them

11. Once we complete that analysis for the different parts of the business, we start to get a clear picture of the Future Value

12. And we can then convert that to a value per share and simply discount it back to the present as we see here

13. You will of course notice one more thing about these charts

- which is that I am simultaneously showing both a 10x P/E Multiple and a 20x P/E Multiple for the Valuation

14. I use 10x to indicate "Buyer's Pricing" and 20x to indicate "Seller's Pricing"

That “Buyer’s Pricing” and “Seller’s Pricing” is just for guidance and does not have to be strictly applied to achieve your target return

15. If we believe that the future P/E Multiple will be equal to or better than 20x, then Buying at any price up to that value will still give you a return of 15% per annum or more

16. But Buying at a 10x P/E Multiple and Selling at a 20x P/E Multiple will naturally enhance your returns to above 8x which over 10 years is equivalent to +15% per annum CAGR

- in this illustration your return would be $5,319 / $657 = 10x and equivalent to +23.3% per annum CAGR

16. And there of course can be higher returns than this from P/E Multiples above 20x

- AAPL already shows us that a similarly mature company can quite comfortably get priced at a P/E Multiple of 30x~40x