DEEP RESEARCH · VALUATION
How to Think About Growth, Profit, and Valuation
A short memo using a monopoly supermarket analogy to frame the tension between growth investment and current-profit valuation
0. Bottom line first
There is a contradiction in valuing a company only by comparing market capitalization with the money it earns today. The key question is whether the company should maximize current profit, or reinvest the cash it earns from a monopoly position to expand the eventual growth curve.
1. The monopoly supermarket analogy
Assume a new city has 100,000 residents and only one supermarket. No other supermarket has the right to enter, and this company has the exclusive right to operate supermarkets in that city.
Interpretation: For this kind of company, I need to ask whether it is more important to make a lot of money from one store today, or to reinvest all of the earnings and expand the scale of the supermarket business.
2. First imagine the point where growth slows
Ultimately, I need to estimate what the company’s revenue and operating margin could be when its growth curve has mostly slowed, roughly when growth falls to around 10% per year or below. If the company is still in the middle of rapid growth, that mature-state imagination is necessary.
For example, I would estimate how much revenue a supermarket used by 100,000 people could generate, even if the estimate is not precise. Then I would discount that future cash flow back to the present.
| Valuation question | Meaning |
|---|---|
| Current profit | A company investing for growth can be undervalued if I only look at today’s earnings. |
| Reinvestment | With monopoly rights, using earnings to expand scale can matter more. |
| Maturity | Estimate revenue and operating margin once growth falls to around 10% or lower. |
| Present value | Discount the mature-stage cash flow back to today. |
Sources
- Original Naver Blog post: https://m.blog.naver.com/PostView.naver?blogId=star_of_self&logNo=223868666567