I wont re-post the report from Morgans Stock-broking here out of respect for their IP.
But they have made some very strong growth assumptions. Even on their forecast numbers and target price ($23.69), they're valuing PME at ~33x FY2021 sales, or 71x FY2021 earnings.
If anything justifies the price, it's the expectation for them to grow from 4% to 29% market shares by 2028, sustaining a CAGR in revenue of ~26% for the next decade and delivering an impressive 83% operating margin. That's not impossible, but 10 years is a long time -- especially in tech, and especially with loads of extremely well funded and capable players in the industry.
So the questions are:
Does PME have a strong enough moat to defend such impressive margins over such an extended period of time? And, can it maintain sufficient technological and service superiority to continue to steal such significant market share over the coming decade?
Even then, if all of the assumptions from Morgans prove accurate, PME will need to attract a PE of at least 25 at maturity to deliver investors a 10% average annual return. A PE of 40 in 2028 is needed for a 15% average annual return. (excluding dividends)
That's certainly not impossible, especially for a company that has delivered such heady growth and commands an extremely strong industry position.
I'd certainly be super happy to generate a 10-15% annual return over the coming decade!
What concerns me is the asymmetry in the proposition. I find it hard to justify forecasting even stronger growth, better margins and higher terminal multiples.
But you don't have to reduce any of Morgan's assumptions by much to get a very different picture. EG. Say PME 'only' achieves average annual sales growth of 22% through to 2028, and an EBITDA margin of 80% (compared to their assumptions for 26% & 83%, respectively), then profit is ~30% lower than their forecast in 2028. At a PE of 25, shareholders can expect an average annual capital gain of ~5% over the coming decade.
To be clear, PME is a significant position for me personally. I have a high level of confidence in it's future. Even under far more conservative assumptions, I think it's unlikely shareholders will lose money from here (over the long-term -- could easily fall a lot in the short-medium term). But to get the kind of returns i'm hoping for, I need to see a lot of things go very right for a long period of time. If PME comes in short on any of these fronts, I'm looking at extremely low risk adjusted returns.
I've always said it's dangerous to overthink valuations for high-quality, fast growing businesses with long runways. And, by extending my view beyond the next few years I've been able to justify increasing my valuation (significantly).
But I'm finding it harder and harder to justify my current weighting. I'll likely be reducing my position (again) soon...