James.P @James_BBaek - Twitter Profile

This is a principle that public investors feel much more than private investors: Growth rate growth = multiple expansion Growth rate decline = multiple contraction Below is a stock chart for Zoom $ZM. The company grew top line and has been profitable throughout the chart period. Despite that, the company experienced a ~9x increase in value followed by a ~90% decrease in value - all of this occurring while the company was growing and profitable. Why such a dramatic change for a company with growth, profitability and a strong balance sheet throughout? The simple reason: the revenue growth rate grew during the pandemic - which led to multiple expansion and a ~9x increase in value. Then, the pandemic subsided and despite the company still growing, the revenue growth rate slowed, which led to multiple contraction and a ~90%+ decrease in value. Public investors know that when the growth rate declines, there can be significant multiple contraction. Even the suggestion that growth rate might decline more than expected can lead to a 25%+ decline in valuation overnight. We've seen this happen around earnings calls all of the time. Private investors don't feel that dynamic as much because they selectively choose comps and value their companies in such a way that doesn't impute nearly as much multiple contraction as occurs in the public markets for similar growth rate declines. By the same token, public investors know that the best returns are had not just from investing in a growing company (which $ZM has been throughout), but investing in a company where growth rates are growing. That can lead to massive multiple expansion and value creation. Private investors are much more likely to value high absolute growth at the time of their investment and expect pretty material growth rate decline over time, rather than investing in moderate growth with the thesis of growth rate growth. To be fair, if a private company exits to a private equity investor, they may not be penalized as much for growth rate declines. However, if a private company intends to transition to public market investors - be prepared for possibly significant multiple sensitivity to growth rates, far more than what happens in the private markets, even if the company is growing throughout the hold period.