Cisco v Netflix: The irrational history of growth companies

clock • 4 min read

Most market commentators believe that the valuation of a growth stock reflects the likely future growth rate of the company. Stocks trading at above average earnings multiples are expected to grow at above average rates.

In reality, high valuations often simply reflect how much growth has already taken place. They do not say anything about the future.  Moreover, as the end market becomes saturated, as can happen with highly successful, single-product growth companies, the forecast for the future (as reflected in the high valuation) becomes something that is necessarily impossible to be fulfilled. Growth companies are hard to spot in the early stages and are often like a slowly forming picture. Initially just a few lines form but eventually, and often quite suddenly towards the end, investors can event...

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