Convequity on X
Our DCFs usually assume a tech company settles into 3% growth forever. Very few ever do. We forecast growth for several years, then step it down linearly to a 3% sustainable (terminal) growth rate at the end of the explicit forecast period. Most of our valuations are tech stocks, so we use 3%: if the broad US economy grows ~2-2.5%, a frontier company presumably grows faster. But tech has little middle ground of steady single-digit growth. Companies grow double digits, or get acquired, or their revenue declines, often until they get acquired. $CSCO and $IBM are rare exceptions. Huge installed bases, enterprise lock-in and services carried them through their single-digit stretches. An industrial that has grown ~3% a year for decades is a very different dynamic. It has a mature market, a few main players plus some smaller ones, not that much competition and no real danger of being acquired. Its moats are physical; its demand saturates rather than disappears. Tech advances civilization and pushes the frontier of productivity and what humans can do. That attracts more competition and more players wanting a piece. We think three things squeeze out the middle. Products get replaced by the next platform rather than maturing. Near-zero marginal cost lets the scale leader undercut on price and outspend on R&D once growth slows. And the market marks slow growers down into cheap targets for buyers who cut costs and fold them in. So setting a sustainable growth rate for tech is theoretically more challenging. Our 3% is really a bet that the company reaches a durable, mature state. A more honest framing is scenarios: durable compounder, acquired, or decline. 3% is a blend of outcomes, none of which looks like 3%.
