The Little Book of Valuation, Updated Edition

Chapter SevenGrowing Pains: Valuing Growth Companies

IN 2001, GOOGLE (GOOG) was a young start-up, with a few million in revenue and operating losses. Over the following decade, the company saw explosive growth, and in 2009, the company reported operating profits of $6.5 billion on revenues of $23.7 billion and had a market value exceeding $200 billion. Google was still a growth company, but a much larger one. In 2022, Google’s operating profits had grown to $74.8 billion on revenues of $283 billion, but growth flagged during the year. The two big questions in valuing it, in 2023, were whether it could sustain growth going forward, and how its risk profile has changed and would continue to change in the future.

So, what is a growth company? There are many definitions for growth companies used in practice, but they all tend to be subjective and flawed. Some analysts, for instance, categorize companies as growth companies or mature companies, based on the sectors that they operate in. Thus, technology companies in the United States are treated as growth companies, whereas steel companies are considered mature. This definition clearly misses the vast differences in growth prospects across companies within any given sector. Others categorize companies trading at high PE ratios as growth companies, trusting markets to make the distinction. Here is an alternative definition: growth ...