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QuestionsCategory: Investor PsychologyHyper-growth stocks
XH asked 5 months ago

Hi Victor,
Hyper-growth businesses always look ‘overvalued’. Does it make more sense to value them based on what their revenues/cash flows might look like 3-5 years out and where they are relative to their total market opportunity?
Xian Hui

1 Answers
Victor Chng answered 5 months ago

Hi Xian Hui,
 
That is the tricky part when you will to value them based on the next 3-5 years because the growth rate assume will definitely be high in order for them to look undervalued. If everything turn out as what you had assumed then it is a good thing. In the event, it does not turn out, you can expect huge volatility in your portfolio as growth companies get hit badly when they missed. 
 
My take is to value them based on their current multiple but purchase it at average valuation since they seldom drop below one standard deviation from the average. 

Hartono Kasman replied 5 months ago

Hi Victor,

How do you calculate the standard deviation?

Victor Chng replied 5 months ago

Hi Hartono,

It is calculated using excel.

You just have to go to the formula tab:

Formula > Insert function > STDEV.P > Select the whole PE column.

once you got the figure just take the average PE subtract by the STDEV.P to get one standard deviation below average.

julian kay replied 5 months ago

thanks for this question Hartono and Victor for the answer. I was also thinking of this question.