Expected Annual Return (Revenue Projection)
The inverse of the fair buy price: given what the stock costs today, the annualized return implied by projected revenue, net margin, share count, and an exit P/E multiple.
When to use: Use to score a stock at its current market price and rank candidates against each other. The output is the compound annual return you would earn if the projection holds and the stock exits at the assumed multiple. Compare it to your hurdle rate: above it, the stock clears; below it, pass or wait for a lower price.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ExpRet | Expected Annual Return | Annualized return implied by today's price and the projection, as a decimal | % |
| Rev0 | Current Revenue | Trailing twelve-month revenue, in the same units as share count | $ |
| gRev | Revenue Growth Rate | Expected compound annual revenue growth as a decimal | % |
| NetMargin | Net Margin | Net income ÷ revenue, as a decimal | % |
| Shares | Shares Outstanding | Diluted shares outstanding | integer |
| s | Share Count Change | Annual change in diluted shares as a decimal; negative for buybacks, positive for dilution | % |
| n | Holding Period | Years held before exit | years |
| ExitPE | Exit P/E Ratio | Expected price-to-earnings multiple at exit | integer |
| MktPrice | Current Share Price | Price the stock trades at today | $ |
Real-Life Examples
Example 1: Large-Cap Priced for Perfection
Same franchise as the fair-price example ($390B revenue, 25% margin, 15.2B shares, 6% growth, 2.5% buyback, 22× exit in 5 years), but the stock trades at $195 today.
Given
Step-by-Step
Roughly 1.9% a year. The forecast is fine; the price is not. Nothing about the business needs to disappoint for this to be a poor holding.
Example 2: Mid-Cap Software at $45
The $2.4B-revenue software business (12% margin, 180M shares, 15% growth, 2% dilution, 18× exit in 10 years) trades at $45 a share.
Given
Step-by-Step
About 7.8% a year against a 15% hurdle. A decade of 15% revenue growth is already in the price, so the projection has to be beaten, not merely met, for the stock to work.
Frequently Asked Questions
No. The output is price-only return, driven by earnings growth and the exit multiple. For a dividend payer, add the dividend yield to the result for a rough total-return figure, or use Total Shareholder Return once you have an actual holding period and dividends received.
That depends on your hurdle, but the comparison should always be against alternatives. If a long Treasury yields 4.5% risk-free, a single stock returning 7% carries a great deal of equity risk for 2.5 points of excess return. Most fundamental investors want a double-digit expected return before taking single-stock risk.
Because the projected exit price is below today's price. Either the market is discounting a better outcome than you have modeled, or the stock is expensive on your assumptions. Check the exit multiple first: it is the input most often set too low relative to what the market is paying for.
They are the same equation solved for different unknowns. Feed this formula the fair buy price and it returns exactly your required return; feed the fair-price formula this expected return as its required return and it returns exactly today's market price.