Margin expansion/compression

Several posters have commented on the “valuations don’t matter” issue and I agree they do matter but posters are ignoring the evolution of “valuation” over the life cycle of companies, specially fast growth ones.

Growth is not linear in nature, it follows a sigmoid or “S” curve. This applies not so much to a specific company as to technologies. The “S” curve can be divided into three equal length parts

1- Inception to mass adoption, to about 15% of total addressable market (TAM)
2- Mass adoption, from 15% to 85% of TAM
3- Market saturation, until death do us part

If you buy before curve in the hockey stick you can make out like a bandit or die in the chasm. Geoffrey Moore suggests “buy the basket, sell the losers.” A safer way is to wait for the winner to emerge but you miss the incredible margin expansion.

In the middle, the fast growth stretch, the risk is one of volatility, these stocks can easily lose 50% on their value but should bounce back. They can test the strongest! The time to sell is when market penetration starts nearing saturation because now margins will compress seriously. A good company in this situation typically converts from fast grower to cash cow (Apple?).

TAM has been given, unfairly, a bad name. The usefulness of TAM is to determine the top of the “S” curve.

A lot of the above has been discussed here but without a frame of reference. The "S curve is that frame of reference.

Denny Schlesinger


A good company in this situation typically converts from fast grower to cash cow (Apple?).

I can remember selling my shares of Apple because they sold Macs. This was before the rest of their gadgets. At the time Macs were something like 2% of the market. Then reading how that market was saturated and their 2% likely not to expand. The S curve had baby triplets shortly thereafter. insert face palm emoji