Do Multiples Matter?
Do valuation multiples matter? There's broadly two schools of thought - one that purchase price dictates your future return and the other that good companies will deliver growth in time to drive value higher, whatever the current price is.
Buying a stock on low multiples is no guarantee of either future multiple expansion or earnings growth. Outside times of panic you can expect there is some logic driving the sellers of those low multiple stocks.
But an excessive price today can burden a company with implied growth expectations that it just can't meet. In a different era, former dot-com darling Sun Microsystems' CEO, Scott McNealy, expressed it well:
Size is an important factor - Sun was "at scale" with >$US10 billion of dollars of annual revenue and its ability to grow into its valuation was limited. A microcap today on 10x revenue that is just beginning to penetrate its market with a competitive advantage may well be able to prove it was a bargain retrospectively. So multiples only mean something with context and analysis.
Funds operated by this manager: