We are posting on this idea fairly frequently, because we are tempted, by the fall in some growth names, and so we keep revisiting this framework.
Required EPS trajectory
Even though some growth stocks have de-rated, the implied/required EPS growth CAGR is still enormous across many of them.
Extrapolate the current market cap for a given stock at a “market-like” rate of return for 10 years, and decapitalise that 10 year forward market cap at 18x, (a plausible proxy for the market) and compare the resultant trajectory to near term earnings forecasts, and it still requires sustained double digit earnings growth for all.
The odds that all 40 names there will be double digit EPS compounders for a decade is nil, to my mind.
Note, the rational for using a market-like 18x forward PE ratio in 10 years is because it is a reasonable stab at what “maturity” looks like for many of these companies, by that stage. They aren’t all likely still in the aggressive growth phase, with large licks of market share to take, by then and are certainly not going to be all reinvesting capital into opportunities at the same rate of return.
So, the model is very simplistic for each stock, but generally right, and that’s more than good enough when assessing them as a group.
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