The S-curve is not just a theoretical concept. We witness it in real life, except that it takes time to play out and, because of this, sometimes people lose sight of it, especially when one gets caught up in the hype of the moment and “shiny object syndrome”. Of course, the reality is that nobody knows for sure what the actual g and r will turn out to be in the future. Everyone has his or her own beliefs and expectations. So, there is no “precise” or “real” valuation. There is just the market clearing price, based on supply and demand for the stock.
A couple of weeks ago, we wrote about valuations for stocks, explaining how they are dynamic (not static) and constantly changing, depending on where enterprises are in relation to their S-curve. We have also been writing a lot on S-curves lately, using them to explain the various growth stages of a company — from infancy (low growth) to expansion (rapid growth) to maturity (low growth and decay).
Every product (services or business) must follow the same life cycle, whether its lifespan is long or short, whether it is a roaring success, run of the mill or downright mediocre. We created a simple matrix table as a tool for investors to determine the implied PER (price-earnings ratio) valuation for a stock based on their expectations of the company’s growth in perpetuity (g) and discount (r) rates at any point in time (you can read the details in our article, “Do you really understand what PER in stock valuations means?”, The Edge, July 29, 2024).
