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?
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.
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