Which company are you better off investing in?
High Growth Compounder 🐇
$1M earnings growing 50% per yer
Valuation: $30M (30x earnings)
Slow and Steady Grower 🐢
$1M earnings growing 10% per year
Valuation: $3MM (3x earnings)
Let's play this out....
High Growth Compounder 🐇
$1M earnings growing 50% per yer
Valuation: $30M (30x earnings)
Slow and Steady Grower 🐢
$1M earnings growing 10% per year
Valuation: $3MM (3x earnings)
Let's play this out....
Company 1 - High Growth Compounder 🐇
Assuming 50% growth rate continues:
Year 1: $1.5MM
Year 2: $2.25MM
Year 3: $3.375
Year 4: $5M
Year 5: $7.5M
Value if trading at 30x: $225M
Value if multiple gets cut in half to 15x: $112.5M
Value if multiple gets cut to 5x: $37.5
Assuming 50% growth rate continues:
Year 1: $1.5MM
Year 2: $2.25MM
Year 3: $3.375
Year 4: $5M
Year 5: $7.5M
Value if trading at 30x: $225M
Value if multiple gets cut in half to 15x: $112.5M
Value if multiple gets cut to 5x: $37.5
Company 2 - Slow and Steady Grower 🐢
Assuming 10% growth rate continues:
Year 1: $1.1M
Year 2: $1.2M
Year 3: $1.32M
Year 4: $1.45M
Year 5: $1.59M
Value if still trading at 3x: $4.7M
Value if trades up to 10x: $15.9M
Value if trades up to 20x: $31.8M
Assuming 10% growth rate continues:
Year 1: $1.1M
Year 2: $1.2M
Year 3: $1.32M
Year 4: $1.45M
Year 5: $1.59M
Value if still trading at 3x: $4.7M
Value if trades up to 10x: $15.9M
Value if trades up to 20x: $31.8M
The moral of the story:
Pay up for quality.
3x earnings might feel like a steal, but unless it can grow and has a long runway, the outcome is far less exciting.
You only have to be right about one compounder in a lifetime to do very well.
Pay up for quality.
3x earnings might feel like a steal, but unless it can grow and has a long runway, the outcome is far less exciting.
You only have to be right about one compounder in a lifetime to do very well.
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