Present Value of Growth Opportunities (PVGO)
Present Value of Growth Opportunities (PVGO)
The part of a share price that pays for future growth rather than current earnings: the price minus the value of earnings held flat forever (EPS divided by the required return). Negative PVGO means the market expects value-destroying reinvestment.
When to use: Use to see how much of a valuation rests on growth expectations. A high PVGO share of price means the stock is priced on a story; a low share means it is priced on what it already earns.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| PVGO | PVGO | Present value of growth opportunities per share | $ |
| P | Stock Price | Current price per share | $ |
| EPS | Earnings per Share | Trailing or forward EPS | $ |
| r | Required Return | Annual required rate of return as a decimal | % |
Real-Life Examples
Example 1: Growth Stock
Share price $100, EPS $5, required return 10%.
Given
Step-by-Step
Half the share price is paying for growth. If earnings simply stayed at $5 forever, the shares would be worth $50.
Example 2: Value Trap
Share price $40, EPS $4, required return 8%.
Given
Step-by-Step
Negative PVGO: the market prices the shares below the value of their current earnings held flat, implying it expects reinvestment to earn less than the 8% required return.
Frequently Asked Questions
If all earnings were paid out and never grew, the share would be a perpetuity of EPS, worth EPS divided by the required return. Everything above that is what the market pays for growth.
Yes, and it is informative: it says the market expects the company's reinvestment to earn less than investors require, so growth destroys value rather than creating it.