Appreciate your analytical approach. Solid. Would have preferred an opinion at the end. Something I ask my self in situations like this is if a company. Say Nividia is trading at $5 T. And some like you are up 10x already. What does it need to be worth 10T in 5 years which is merely a 15 % IRR. Or $15 T or 3x is 25 %. The curse of a super high valuations are “ what have you done for me lately or in the future ?”
It’s too personal a decision. Depends on circumstances, e.g. what are your resources, time horizon etc. It’s very useful for deciding whether it’s a suitable investment and how to size a position. I appreciate the comparison information also. Very grateful for this analysis which was free and beyond my ability to produce!
I always learn something new from your work. I've started using the 3P test all over the place in my life. Working my way through The Corporate Life Cyle book - great read indeed. Thanks!
Aswath discusses the 3P test mid-way through the article above, and provides a link to his prior blog post. Also in the YouTube video, he talks about using the 3P test around 19:50 mark.
I use it as an intuitive checklist when faced with uncertainty. Very easy to remember once I got used to it.
“There is talk of a “huge” market for AI products and services, with little to show as tangible evidence of that market’s existence right now…”. That’s a big concern - amazing potential, but what is the market for it? What’s to stop companies from adapting AI to their needs, but on a limited budget. How good does AI need to be for most companies? If you’re just trying to help customers make a booking or sort out their insurance policies how advanced does the AI need to be?
Great piece. The gap btw the realists and the believers feels wider than ever right now. I think finding the balance between the AI narrative and the actual numbers is the hardest part of this cycle.
As someone who’s leaned on your valuation references since day one, this framing is one of the cleanest ways to cut through the overvaluation debate. Ultimately, fundamentals are what matter the most: unit economics, reinvestment, cost of equity, etc. vs. cold multiples that are context-agnostic.
I think the 3P test is especially useful in today’s AI-inflated narratives because we are definitely seeing what is "possible" today, but there's a wide gap between where we are and what is economically plausible and probable. Truly appreciate how you continue to make complex valuation questions accessible without oversimplifying them.
Appreciate your analytical approach. Solid. Would have preferred an opinion at the end. Something I ask my self in situations like this is if a company. Say Nividia is trading at $5 T. And some like you are up 10x already. What does it need to be worth 10T in 5 years which is merely a 15 % IRR. Or $15 T or 3x is 25 %. The curse of a super high valuations are “ what have you done for me lately or in the future ?”
It’s too personal a decision. Depends on circumstances, e.g. what are your resources, time horizon etc. It’s very useful for deciding whether it’s a suitable investment and how to size a position. I appreciate the comparison information also. Very grateful for this analysis which was free and beyond my ability to produce!
Currently watching it! You just know when Mr. Damodaran releases something, you're in for a treat.
I have been reading your books and articles for 20 years and always come away better from the experience. Thanks for sharing your analysis!
I always learn something new from your work. I've started using the 3P test all over the place in my life. Working my way through The Corporate Life Cyle book - great read indeed. Thanks!
What's that 3p test mate?
Could you share me the link?
Aswath discusses the 3P test mid-way through the article above, and provides a link to his prior blog post. Also in the YouTube video, he talks about using the 3P test around 19:50 mark.
I use it as an intuitive checklist when faced with uncertainty. Very easy to remember once I got used to it.
1. Is it possible?
2. Is it plausible?
3. Is it probable?
Just plugged in your assumptions into my 5Y DCF, it fits like a glove (note, terminal ROIC 30%):
https://shorturl.at/8Qv6I
Great article. Thanks for sharing these thoughts.
“There is talk of a “huge” market for AI products and services, with little to show as tangible evidence of that market’s existence right now…”. That’s a big concern - amazing potential, but what is the market for it? What’s to stop companies from adapting AI to their needs, but on a limited budget. How good does AI need to be for most companies? If you’re just trying to help customers make a booking or sort out their insurance policies how advanced does the AI need to be?
The first time I saw the 3Ps was in your book about narratives and numbers, ever since I always ask myself the 3Ps whenever analysing a company.
Very interesting and helpful. 8-9% cost of equity seems high. I wonder how sensitive to this assumption break-even revenue is.
Great piece. The gap btw the realists and the believers feels wider than ever right now. I think finding the balance between the AI narrative and the actual numbers is the hardest part of this cycle.
As someone who’s leaned on your valuation references since day one, this framing is one of the cleanest ways to cut through the overvaluation debate. Ultimately, fundamentals are what matter the most: unit economics, reinvestment, cost of equity, etc. vs. cold multiples that are context-agnostic.
I think the 3P test is especially useful in today’s AI-inflated narratives because we are definitely seeing what is "possible" today, but there's a wide gap between where we are and what is economically plausible and probable. Truly appreciate how you continue to make complex valuation questions accessible without oversimplifying them.
Thank for your analysis. There is a curious case for the 3Ps, Palantir.
A valuation inspired by your methods can be found here, perhaps you'll find it interesting.
https://petergarnry.substack.com/p/is-palantir-just-another-tulip-bubble?utm_source=post-banner&utm_medium=web&utm_campaign=posts-open-in-app&triedRedirect=true.
Your analysis would certainly be very welcome too, as Michael Burry estimates its fair value near 30, about 1/6th of the last price.
If reinvest rate is 100%, then，
g
= ROE×Reinvest ratio
= ROE × 1
= ROE
.
Then
Value of Equity = 0, according to the formula.
The market’s perception of value and theoretical value are two different things and should not be considered as 1:1. Monitor transactions and states.
The story ofc changes if the growth phase is much longer than of just 5 years
Dear Prof,
These comps can’t be larger than the market they serves, sooner or later they will likely to converge into growth rate of economy.