In today’s technology and internet-enabled world, some rapidly growing companies grow at unearthly rates of 50%, 100% and even 200% a year during the first few years. These tremendous growth rates are not sustainable for long periods. These high growth rates usually drop off in a few years and reach more earthly rates of 10%, 15%, 20%, or even 30% which are still fantastic growth rates for most companies. Eventually, even these companies become mature, face competition and encounter obstacles, and over time slow down to grow at historical rates.
Therefore, if you are trying to value a rapidly growing company, a three-stage or even a multistage model is the way to go. The first stage may have the companies grow at unearthly speeds of 50%, 100% or 200% a year. The second stage could have the companies grow at more earthly rates of 15%, 20% or even 30%. The third stage could have the growth rates decline steadily to terminal or horizon stage growth rates. We assume that cash flows in the final and last stage, also called the terminal or horizon stage, are constant or grow at a small but constant rate.