I'm a bit confused about the definitions of value and growth. I heard that companies that have high P/E ratios are growth companies. Are start-ups (think Silicon Valley start-ups, most of which fail very quickly) value companies or growth companies? I think start-ups don't make a lot of money at first so they have high P/E ratios, but they seem to be very risky. How would you classify start-ups into value vs growth?
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1Consider how you'd compute a P/E if the E is negative or zero.– JB KingCommented Oct 13, 2015 at 2:24
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This is my question as well. I'd calculate the PV of all the future earnings. However, the discount rate is tricky. When it comes to start-ups, how would you decide whether they're growth or value?– user1691278Commented Oct 13, 2015 at 3:02
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most start-ups aren't public so not sure how you would begin to look at their books/financial. Value is a stock who has a P/E that is lower RELATIVE TO IT'S PEERS. They also tend to pay out earnings and are established companies. Growth stocks you usually have to use a different metric besides P/E as they might invest heavily in the future earnings and have no current earnings.– RossCommented Oct 13, 2015 at 12:51
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3 Answers
Neither. Why would you have to classify startups as value or growth?
A startup is its own category. You can find startups at "classic" valuations (price/book... Etc) that would make investors' eyes water...
But that happens because many startups are early stage and so revenue or book value or other classic valuations don't quite suit.
In most cases, startups are growth companies. That's because they are founded with an idea and a little money. Outside investors are paying for a piece of the founders' "idea," and the hope that the idea will make a little money grow into a lot of money.
There are exceptions. Startups in hard assets companies such as real estate and oil and gas are value investments. That is, they take "ideas" that are solidly proven, so you are getting a lot of "house" or oil drilling equipment for your money. Unlike the standard startup, you're not paying for the "idea."
Other metrics like Price/Book Value or Price/Sales can be used to determine if a company has above average valuations and would be classified as growth or below average valuations and be classified as value. Fama and French's 3 Factor model would be one example that was studied a great deal using an inverse of Price/Book I believe.
