Present Value of Growth Opportunities (PVGO)

  • A stock's valuation can be heavily influenced by future growth expectations.
  • As a company generates positive earnings and retains these earnings, its book value of equity increases; however, in order for the positive retained earnings to create wealth for investors, the company's return on equity must exceed its cost of equity.
  • In theory, when a company sees no attractive growth opportunities, it should payout all earnings as dividends (yeah right, like corporate executives are going to do that!).
  • PVGO allows analysts to calculate how much growth opportunities contribute to a company's current share price.

PVGO = Price0 - (Earnings current period / rce)

If a company has a stock price of $75 and the PVGO calculation is $50, then growth opportunities contributes 2/3rds of the share valuation.