Chapter 8 : Sales Growth

No one cares how valuable your product is if its addressable market is small. The key isn't so much the number of users as it is the dollar size of the market.

Jose Ferreira

Don Valentine, who was the partner of Sequoia Capital, mentioned that the major reason why Sequoia was successful was that it invested into companies that targeted big markets. He goes on to mention the reason, saying that if you don't target big markets you cannot build an enterprise.

The emerging needs of the consumers, the potential of the product, and the opportunity to grow in the market lay a foundation for strong growth and longevity. Amazon's founder Jeff Bezos only targeted the USD 10 billion book market in the US, but the vision and opportunity for market penetration by an expansion of product portfolio and new markets gives it longevity.

Business Valuation is a process of forecasting free cash flows for a company or business and discounting back to the present with an appropriate discount rate.

Sales Growth and factors driving its growth

"Forecasting Sales" is the fourth step in the process of valuation and begins with estimating sales for the forecast period. The sales estimate can be expressed in absolute numbers or as a year-on-year growth in percentage terms. Sales Growth is one of the most important value driver assumptions in Valuation. It primarily depends upon:

  • Market size and Market Growth Rate of the Product and Services the Company is addressing.
  • Company's Investment Plan and Strategy: Let's look at Tesla - It will rule American Roads. What is the size of the market, how much market share it will have, what is its competitiveness, how much investments are required to achieve it, and in what time frame.
  • Price-Led Growth: This depends upon Pricing Power, Inflation, Product Mix, Premiumization, etc.

It is also important to review the lifecycle stage of the company and the type of industry it is operating in, for instance:

  • Many companies, like FMCG companies, are likely to grow their established brands along with Nominal GDP while maintaining/increasing/losing their market share. Essentially GDP for most companies is an important factor in determining the Compounded Annual Growth Rate of Sales.
  • Then there are situations like Value Migration, for instance very few investors understood the global outsourcing opportunity for the IT Services Offshore Model, where a lot of IT budgets from the US and Europe were shifting to India. The Indian Offshoring Market grew from $1 billion in 1996 to greater than $150 billion in 2020.
  • Some companies need to be reviewed based on capacities they are going to add over a period of time and their utilization. For example, if you are valuing a cement company then it is important to look at the current capacity, incremental capacities to be added/in the pipeline during the next few years, and their likely capacity utilization.

Sales Growth depends upon Market Size and Opportunity, Company's Competitive Position and the likely Market Share it plans to acquire during the Forecast Period.

Sale Growth depends upon the company's competitive position, Longevity—which defines value growth duration and the market size—and market share it plans to acquire during the forecast period.

I will run through a simple example of Black Bay Pizza to explain each value driver explained in each chapter. After the explanation of each value driver, there will be a chapter demonstrating two case studies of companies listed on the stock markets.

Example of Sales Forecast for Black Bay Pizza

Table 4 illustrates the computation of sales based on sales growth rate for Black Bay Pizza based on the following assumptions:


Forecast Period 5 Years
Sales in Prior Period 100
Sales Growth, CAGR 1-3 Years 15%
CAGR 4-5 Year 12%

Table 4 - Computation of Sales

Year 0 1 2 3 4 5
Sales 1,000 1,150 1,323 1,521 1,703 1,908
YOY Growth 15% 15% 15% 12% 12%

Sales in Prior Period is Operating Revenue reported by the company for ideally trailing 12 months. In case data for the trailing 12 months is not available, then one may use the data for the immediately preceding financial year. The sales should not include other income or non-operating revenue.