Just for those who want to apply some pigeon math.
With stocks what you measure is compound annual growth. Mathematically how you do it is add 1 to the percentage of average growth and then ^ to the number of years of growth.
So, for example, if you think SHOP can grow at an annual compounded rate of 25% for the next 5 years the formula would be like so: 1.25^5 and that equals 3.05 or 305% growth.
At 35% you get 1.35^5=4.48 or 448%.
We forget how long 5 years is. 5 years ago Obama has just won his second term, Benghazi was just hitting the newspapers, ISIS did not exist in any meaningful form in the press, SHOP was not public, etc.
A company that can grow at a compounded annual rate of 20 or 25% for 5 years is extraordinary. Very few do so, and even fewer do so at higher rates of growth. It has s pure conjecture if any company can do so. Nevertheless with some companies you think they change their CAP and the TAM to do so.
Then you panic, is it all just baked into the share price anyways?
Take SHOP. Take it at a 5 year 25% compounded growth (which would require a marked slowdown given that SHOP will have much higher grow the in 2017 and most likely 2018. That means that SHOP’s revenues in 5 years will triple from what the trailing revenues are today. Trailing 12 month revs as an f 12 31 16 were $389 million. End of 2021 would then be revenues in excess of $1 billion and assumedly still growing.
Run your own numbers. Is it in a bubble? Is there no appreciation Left for long term holders? Keep in mind that CRM at much slower growth still maintains in excess of 7x sales valuation. Run your own numbers.
Look at VEEV to see the type of premium the market will give a company with a rock solid CAP. Or look to UA to see how a company with less CAP can be decimated when growth slows and marketshare declines.
Always good to put some numbers behind it.
In the long run companies like ISRG retain a premium for a very long period of time. Is SHOP deserving of a premium? At some point the premium may become so much that you are compelled to sell. At other times compelled to buy. This is not prognostication however, just present perception testing of how the world, voting w its dollars, in the holistic environment we are in, values he company. There is a lot of substance you can infer just from the numbers to understand what is built into the value f the stock, what is nto, and why the premium, and can it last.
This is why I called SHOP fairly valued. Nevertheless, the market appears to see more growth than this hypothetical future, and perhaps more CAP and perhaps a lot larger TAM. Larger CAP means laonger period of time of premium returns (not reverting to the mean), and longer TAM means much longer compounded growth period than the mean company, and thus the premium. That is what is baked in the numbers.
This has also been the press narrative of late fro SHOP. Focusing n high switch Costs, with its competitor running gross merchandise sales that are nearly 10x SHOPS GMV, yet still growing, talk of secular move to web, and that SHOP is the easiest and perhaps most complete tool (depending on opinion) that enables this, with awesome management, culture, vision, and quadrupling headquarters, in the Canadian city that is pushing to be the next Silicon Valley.
The companies financial results, business momentum, all support. These claims. The narrative will change over time. But look for example at VEEV again. Revenue grow th rate is materially slowing, but its premium has gone up if anythzing, why?
Because it’s CAP is huge, and the market believes VEEV can and will expand its TAM. Long way down if the company disappoints, but plenty F huge rewards long term if they do so. Thus some fear is built into the valuatiOn, as there is room for upside, but so is a lot of confidence.
The fear is wha t provides the upside potential, the confidence is a signal tha t investors sees some very good potential. Thus wh truly great companies are always expensive, but always have that fear discount as well relative to their perceived futures, and thus why they can p reduce such great returns as the portion of the business tha t creates confidence allows the company to no t revert to the mean and thus defeat the fear, that creates the wall of worry that these stocks climb up over time as they fundamentally p erform.