What is value?
This is one of the most fundamental yet misunderstood question in investing. Many investors assume value is simply about buying “cheap” stocks. They rely heavily on traditional metrics like low P/E ratios, low P/FCF, or a recent drop in share price. However, these metrics (more of a proxy for value) only suggest a possibility of value— which sometimes they are and sometimes they aren't.
True value lies in the gap between a company's current stock price and the future cash flows it is expected to generate over its lifetime, discounted at a reasonable rate. To find value, one must ask— "Are those future cash flows already fully reflected in the current stock price, or is the market underestimating them?"
This is where the idea of "Growth" enters the value equation. Growth is often mistakenly treated as the opposite of value, but in reality, it’s a core driver of value. A business that can sustainably grow its free cash flows becomes more valuable over time—even if it trades at high valuation multiples today.
By taking such a narrow view of value— anchored to low P/E or low P/FCF— many investors are quick to dismiss companies with high P/E ratios, focusing solely on those with low multiples. While this approach can sometimes yield good returns, it often causes them to overlook high-quality businesses that have historically traded at “higher” valuations.
Instead of fixating on price multiples alone, the true focus should be on a company’s ability to generate free cash flow. A business with strong and sustainable cash flow growth can deliver superior returns— even if its P/E appears high— because the market eventually recognises the value embedded in that growth. This shows why companies like Amazon, Tesla and others have historically been undervalued based on their future cash flows and potential to dominate markets, even though they trade at high P/Es.
Finding value early in such companies (Amazon, Tesla, etc) requires looking beyond traditional valuation metrics and focusing on understanding the drivers of their future free cash flows. This means analyzing the durability and scalability of their business models, their competitive advantages, their potential market size and the winner-takes-most market dynamics. It also means understanding management’s vision, their capital allocation decisions and how these decisions will shape the ultimate destination and long-term value of the business.