Why the price and the value disagree

The question everyone asks

A company page shows two numbers side by side: what the market is paying, and what our model says the business is worth. When they differ — and they usually do — the immediate reaction is to ask which one is wrong.

That question has no honest answer. Nobody knows. What can be answered, and is far more useful, is a different question: what would somebody have to believe for today's price to be correct?

Running the model backwards

A DCF turns assumptions into a value. Run it in reverse and it turns a value into assumptions: hold everything else steady, and solve for the one input that would make our model produce exactly the market price.

Do that with revenue growth and you get a sentence like “the market is pricing this as if revenue grows 11% a year”. That is not a guess about what investors think. It is arithmetic — the growth rate that reconciles the price with the rest of the model.

Why that number alone is worthless

Here is the catch, and it is the reason most tools that do this are not telling you anything. There is *always* some growth rate that reproduces any price. Saying “the market implies 11%” is true of every company at every price, so on its own it carries no information at all.

It only becomes a judgment when you have something to measure it against. So we compare the implied rate with what the company has actually delivered — its real revenue growth over the last five years, computed from the filings we already ingest, measured trailing-twelve-months at both ends so seasonality cannot distort it.

Now the sentence does work: the market implies 11%, the company has grown 24% a year for five years. Either the market expects a sharp slowdown, or it is mispricing the business. That is a question worth your attention. Which of the two it is, we do not claim to know.

Slowing down is normal

One thing worth calibrating before you read too much into a gap: growth rates fall over time, almost always. A company growing 40% a year is not expected by anyone sensible to keep growing 40% a year, and a market pricing it at 30% is not making a claim of mispricing — it is doing ordinary arithmetic about a business getting larger.

That is why we only describe an implied rate as below or above the record when it is well outside what normal deceleration explains. A tool that flagged every good company as mispriced would be right about nothing in particular.

Many answers, not one

The reverse solve has a second catch. We solved for growth while holding margins, the discount rate and everything else fixed — but we could just as easily have held growth fixed and solved for margin, and we would have got a different, equally valid explanation of the same price.

So we show both. The price might be consistent with 11% growth at today's margins, or with today's growth at a much lower margin, or with countless combinations in between. There is no way to recover what the market actually believes from a single price, and any tool that presents one solved figure as “the market's view” is overstating what it knows.

What isn't disagreement at all

Some of the distance between price and value is not a difference of opinion. Before weighing the rest, it is worth subtracting:

• Timing — our figures are struck on a filing date; the price moves every day. Part of a gap can simply be what happened afterwards.
• Our own uncertainty — every valuation has a robustness read. If the number swings hard on terminal growth, some of the gap is our error bars rather than the market's error.
• What the model cannot see — continued dilution, guidance that has historically been unreliable, events recorded since the run, or past growth that was bought through acquisition rather than earned.

Why we stop there

You may have noticed we never say the market is wrong. That is deliberate, and it is not timidity.

The moment a tool tells you a stock is mispriced, it has replaced the thing you came for. The value of an explicit valuation is that you can see every assumption, disagree with any of them, and reach your own conclusion — which is why every figure on this site is editable. A verdict would make that machinery decorative.

It is also the honest position. We can tell you what the price must assume and how that compares with the record. We cannot tell you whether the market has seen something we have not. Nobody can, and the ones who claim otherwise are selling something else.