Why valuation is a range, not a number

Ask ten analysts "what's the fair value of this stock?" - you'll get ten different answers, and each will sound confident. The truth is that valuation isn't physics; it's a forecast, and a forecast can never be a single number.

We don't pretend otherwise. Every valuation we publish is a band, not a price target.

What "fair value" actually depends on

A stock's fair value depends on three things, each of which is a guess:

1. What earnings will the company make in the next 5-10 years? Nobody knows. 2. What multiple should those earnings get? Depends on competition, interest rates, growth, market mood. 3. How risky is the company? Affects what discount you apply to the earnings stream.

Tiny changes in any one of these change the answer enormously. A company growing 18% deserves a higher multiple than one growing 12%. Five years of 18% is wildly different from five years of 12% in compounded value.

So instead of choosing one number and pretending we know, we work three cases.