How to Value Growth Stocks

Valuing High Growth Stocks

Growth stocks are a different breed, and they cannot be valued in the same way you value average businesses. When you are looking at regular businesses, the company’s current valuation is a primary consideration. This is typically measured utilizing metrics such as the P/E ratio, price to cash flows, price to sales and other valuation tools. With growth stocks, the value lies in the future. The incredible power of compounding applies. What truly makes growth stocks different is how fast and how much they grow their earnings and cash flows. With traditional or average companies, it takes 7 to 10 years or longer to double your money. Therefore, measurements such as current earnings yield and/or current cash flow yield are paramount.

Growth stocks grow very fast, but that is very hard to do. Therefore, investing in growth stocks is technically riskier. However, when successful, the rewards far outweigh the risks. It is only by investing in growth stocks where you can find the proverbial 10 baggers or more that Peter Lynch often talked about. Consequently, it is both logical and necessary that when investing in growth stocks you focus on the future. Metrics such as earnings yield are still critical, however, with growth stocks it is future earnings yield rather than current earnings yield that really matters.

With this video I will be covering the most famous growth stocks in the market: Facebook (FB), Amazon ANZN), Netflix (NFLX) and Google (GOOGL) (Alphabet) a.k.a. FANG stocks. To add insight to this video, I also offer this link on a previous video I did a few years ago on the same stocks. It might be fun to compare the forecast being made in this initial video with the actual results that are currently being reported in this current video.

Disclosure: Long FB, GOOGL, AMZN

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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