Valuation by Stage Analysis. Understanding how the appropriate valuation metrics change as a company matures.

This is a fantastic visual cheat sheet for understanding how the appropriate valuation metrics change as a company matures. It was created by Brian Feroldi, a well-known financial educator who specializes in breaking down complex investment concepts.

Here is a detailed analysis, discussion, and commentary on the "Valuation by Stage" framework.

1. The Big Picture: The Lifecycle Lens

The core thesis of this image is that "You can't use a hammer for every nail." Applying a standard P/E (Price-to-Earnings) ratio to a young, unprofitable tech startup is meaningless because the "E" is negative. Conversely, relying solely on Price-to-Sales for a mature, slow-growth conglomerate might overlook its massive cash-generating ability.

The chart segments a company's life into six distinct stages:

1. Startup: Focus on survival and finding a market.

2. Hyper Growth: Prioritizing revenue at all costs.

3. Break Even: The transition from burning cash to generating it.

4. Operating Leverage: Profits grow faster than revenue.

5. Capital Return: The company is a "cash cow."

6. Decline: Shrinking relevance and revenue.

2. Analysis of the Matrix

The matrix cross-references the Source of Value (what actually drives the stock price) with the Valuation Metrics (how we measure that value).

Top Row (Source of Value): This is the genius of the chart. It defines why a stock goes up at each stage.

• Product/Market Fit: The idea that the company has something people want.

• Revenue Growth: The top line is expanding rapidly.

• Positive Cash Flow: The company is self-sustaining.

• Margin Expansion: Profits are getting fatter.

• Buybacks, Dividends, M&A: Returning capital to shareholders.

• Asset Sales: Liquidating the company for parts.

The Vertical Axis (Valuation Metrics): These are the tools investors use to slap a price on the company.

3. Commentary and Key Takeaways

Here are the most important insights from this framework:

A. The "Not Useful" Zones are Just as Important as the "Useful" Ones

• TAM (Total Addressable Market) becomes useless after Break Even: In the early stages, a huge TAM justifies the "story" (e.g., "We only have 1% of a billion-dollar market!"). But once a company is mature, the TAM is already factored in. If a mature company like Coca-Cola is struggling, you can't blame the size of the beverage market.

• P/E ratios are useless for growth companies: As the chart shows, looking at trailing earnings for a company in Hyper Growth is "Not Useful." You are paying for future potential, not past profits.

B. The Shift in Focus: From Top-Line to Bottom-Line

Notice the transition of Price to Sales (P/S) .

• Stage 1-4 (Startup to Op. Leverage): P/S is "Useful." This is because when a company isn't profitable, revenue is the cleanest measure of growth and market share.

• Stage 5 (Capital Return): P/S becomes only "Somewhat Useful." Once a company starts buying back stock or paying dividends, earnings and cash flow matter more than just top-line sales.

C. The "Sweet Spot" for DCF (Discounted Cash Flow)

The chart marks Discounted Cash Flow (DCF) as "Useful!" (with an exclamation mark) in the Capital Return stage.

• Why? DCF requires predicting future cash flows far into the future. This is incredibly hard (and often a "garbage in, garbage out" exercise) for a volatile growth stock.

• However, for a mature company like Johnson & Johnson or Procter & Gamble, their cash flows are relatively predictable. Therefore, DCF is actually a powerful tool here to see if the stock is undervalued relative to the cash it will throw off for the next decade.

D. The "Key Expression" at the Bottom

The bottom of the image seems to be a slightly jumbled legend or a quick summary, but it reinforces the idea that Revenue Growth is the key for young companies, while Buybacks/Dividends are the key for old ones.

4. Practical Application for Investors

How should you use this?

1. Identify the Stage: First, determine where a company sits on the lifecycle line. Is it a Hyper-Growth SaaS company (Stage 2) or a Break-Even Auto Manufacturer (Stage 3)?

2. Pick the Right Tool: Once you know the stage, look only at the "Useful" metrics.

   • If it's Stage 2: Ignore the P/E ratio. Focus on Revenue Growth and the P/S ratio compared to history and peers.

   • If it's Stage 5: Stop obsessing over revenue growth (it might be low single digits). Focus on Free Cash Flow yield and the dividend payout ratio.

3. Avoid Value Traps: If a company is in Decline (Stage 6) , the chart suggests almost no metric is useful except perhaps Asset Sales. This implies that traditional valuation metrics can make a declining company look "cheap" (low P/E) when it is actually a value trap.

Conclusion

This is an excellent mental model. It forces investors to move away from rigid, one-size-fits-all valuation formulas and toward a contextual analysis. It acknowledges that a stock's price is driven by different fundamentals at different points in its corporate life, and using the wrong metric is a surefire way to misinterpret a company's value.

SUMMARY

Here is a concise summary for an investor, based on Brian Feroldi's framework:

The Core Principle: A company's value is driven by different things as it ages. To avoid overpaying (or missing an opportunity), you must match your valuation tool to the company's current life stage.

The Investor's Cheat Sheet

1. The Startup (Focus: Product/Market Fit)

• Ignore: Earnings, Cash Flow.

• Use: Price-to-Sales (P/S). You are betting on the story and future growth; revenue is the only hard number available.

2. Hyper Growth (Focus: Revenue Growth)

• Ignore: P/E, DCF (Discounted Cash Flow).

• Use: P/S and Price-to-Gross Profit. The market is paying for rapid top-line expansion. Profits don't matter yet.

3. Break Even (Focus: Positive Cash Flow)

• Ignore: Trailing earnings.

• Use: P/S and Price-to-Forward Earnings. The company is turning the corner; you need to start paying attention to future profitability, not just revenue.

4. Operating Leverage (Focus: Margin Expansion)

• Ignore: (Transition phase).

• Use: Forward Earnings and Forward Free Cash Flow. The company is now keeping more of its revenue as profit. This is where the "growth" story meets "value" math.

5. Capital Return (Focus: Buybacks, Dividends, M&A)

• Ignore: TAM (Total Addressable Market) and high P/S.

• Use: Price-to-Earnings (P/E), Free Cash Flow, and DCF. This is a cash cow. Value it based on the cash it returns to you now, not the growth story.

6. Decline

• Ignore: Almost all standard metrics (they will lie to you).

• Use: Asset Sales. The only value left might be the physical parts of the business.

The Golden Rule

• If the company is young and growing fast: Look at Revenue (P/S) .

• If the company is mature and printing money: Look at Cash Flow (P/E, DCF) .

Mixing these up (e.g., buying a mature company for its revenue growth, or a startup for its P/E ratio) is a common path to losses.

Tesco, UK

 Over the last five years, Tesco has demonstrated a strong and resilient business performance, navigating a period of significant economic challenges—from the post-pandemic landscape to severe cost-of-living inflation—to deliver consistent sales growth, recover profitability, and return substantial cash to shareholders . The company's strategy has focused on reinvesting in its core customer offer through value initiatives like Aldi Price Match and Clubcard, which has resulted in growing market share and improved customer satisfaction .

Here is a summary of Tesco's financial performance over the last five fiscal years.

📈 Strong Sales Growth and Market Share Gains

Tesco has consistently grown its top-line sales over the five-year period, from £57.89 billion in 2021 to £69.92 billion in 2025 . This growth has been driven by a successful strategy focused on value and loyalty:

• Winning Customer Offer: The combination of "Aldi Price Match," "Low Everyday Prices," and exclusive "Clubcard Prices" has made Tesco highly competitive, helping customers manage the cost-of-living crisis .

• Record Market Share: This strategy has paid off significantly. By early 2025, Tesco's UK market share reached 28.3%, its highest level since 2016, with 21 consecutive periods of growth . This momentum continued into the first half of the 2025/26 financial year, with share up a further 77bps to 28.4% .

• Volume and Premium Growth: The focus on value has driven volume growth, while innovation in premium ranges like 'Finest' has also been a key contributor, with Finest sales growing by 15% in FY24/25 .

💰 Profitability and Shareholder Returns

After a dip in the 2022/23 fiscal year due to high inflation and impairment charges, profitability has rebounded strongly:

• Profit Recovery: Adjusted operating profit fell to £2.63bn in 2022/23 as the company absorbed significant cost inflation to protect customers . However, it rebounded by 11% in 2023/24 to £2.83bn and grew by a further 10.6% in 2024/25 to reach £3.13bn .

• Cash Returns to Shareholders: Reflecting confidence in its strong cash flow and balance sheet, Tesco has undertaken an aggressive share buyback programme. Since October 2021, it has bought back £3.7 billion worth of shares as of October 2025 . The dividend per share has also been on the rise, increasing by 13.2% for FY24/25 to 13.70p .

🚀 Strategic Investments and Future Outlook

Tesco is not resting on its laurels and is investing in long-term growth platforms:

• Digital and Convenience: The company is expanding its online capabilities, with its 'Whoosh' rapid delivery service now covering over 70% of UK households . It also launched "Tesco Marketplace" to offer third-party general merchandise online .

• Personalisation and Media: With Clubcard penetration now over 80% in its markets and 18 million app users, Tesco is building a powerful digital media and insight platform to offer personalised deals and a new revenue stream .

• Cautious Optimism: For the 2025/26 financial year, Tesco initially guided for lower profits to allow for further investment in a highly competitive market . However, due to a strong customer response to its investments, it upgraded its profit guidance in October 2025 to between £2.9bn and £3.1bn .

In summary, Tesco has successfully fortified its position as the UK's market leader by doubling down on value and loyalty during a period of economic strain. This has translated into consistent sales growth, a powerful recovery in profits, and significant cash returns for its shareholders.

Health Economics

 

Here is a summary of the video from the 0:00 to 15:00 minute mark:

0:00 - 0:50 Introduction
Professor Gruber introduces the final lecture as a different kind of class. He will apply the economic tools learned throughout the semester to the real-world topic of health care policy, drawing on his 25 years of experience in the field.

0:51 - 3:46 Background: The US Health Care Problem

• High Spending: The US spends far more on health care than any other developed nation—about 17.5% of its GDP (nearly $10,000 per person). This is roughly double what many European countries spend.

• Mixed Outcomes: Despite this spending, health outcomes are unequal. The "haves" (well-insured) get the best care in the world, evidenced by a million people coming to the US for treatment. The "have-nots" get some of the worst care. For example, a Black baby is twice as likely to die in its first year as a white baby, a rate worse than Barbados.

• The Two Fundamental Problems: The US faces two core issues: spending is too high, and access to care is too unequal. The lecture will focus on these two aspects.

3:47 - 12:27 The Access Problem

• The Uninsured: Before 2014, about 50 million Americans were uninsured.

• Market Failure, Not Just Choice: The fact people are uninsured is a policy concern due to market failure (adverse selection) and redistribution (the uninsured are poorer).

• How Insurance Worked (Pre-ACA):

  • Employer-Sponsored Insurance (60%): Most Americans get insurance through their employer. Insurers prefer large groups because risk is predictable.

  • Individual Market (6%): This market functioned poorly due to adverse selection. Insurers feared only sick people would buy insurance, so they protected themselves through "pre-existing conditions exclusions" (refusing to cover costs related to past illnesses) or "medical underwriting" (denying coverage or charging exorbitant prices to sick individuals). This meant if you were sick, you often couldn't get insurance.

  • Government Insurance (20%): Two main programs: Medicare (for the elderly) and Medicaid (for the poor). These programs offered full coverage without discrimination.

  • The Uninsured (15%): These were typically the "working poor"—people with jobs that don't offer insurance but who earn too much to qualify for Medicaid.

12:28 - 15:00 Historical Reform Attempts and Two Extreme Solutions
For 100 years, efforts to reform health care failed because they were caught between two extreme solutions:

• Solution 1: Subsidization: Giving money to help people buy insurance. The problem is that it doesn't fix insurers' incentive to avoid sick people and is politically difficult.

• Solution 2: Single-Payer: A government-run system for everyone (like in Canada). The lecture outlines three major political barriers to this:

  1. Paying for it: It requires a massive, visible tax increase, even though it would replace the "hidden tax" of employer-sponsored insurance (where employers pay lower wages in exchange for providing insurance). People don't believe employers would pass the savings back to them in wages.

  2. Status Quo Bias: People with employer-sponsored insurance are reluctant to give up what they know for an unknown new system, due to loss aversion.

  3. Powerful Lobbying: Health insurance is a massive industry that would fight aggressively to protect its business.

Here is a summary of the video from the 15:00 to 30:00 minute mark:

15:00 - 21:00 The "Three-Legged Stool" Solution
Stuck between the extremes of subsidization and single-payer, economists (including Professor Gruber) developed a new approach, first pioneered in Massachusetts and later becoming the basis for the Affordable Care Act (Obamacare). This "three-legged stool" consists of:

1. Ban Insurer Discrimination: Insurers are no longer allowed to deny coverage or charge higher prices based on pre-existing conditions. They must offer insurance to everyone at a standard community rate.

2. The Individual Mandate: If insurers are forced to accept everyone, they will only get sick buyers and go bankrupt. To fix this, everyone is required to purchase insurance. This ensures a balanced pool of both healthy and sick people, allowing insurers to function like a bookie setting odds to guarantee a profit.

3. Subsidies: A mandate is unfair if people cannot afford insurance. Therefore, the government provides income-related subsidies to make coverage affordable for low-income individuals.

21:00 - 30:30 The Impact and Ongoing Debate on Access

• Did it work? Yes, it was the largest insurance expansion in American history, covering about 45% of the uninsured nationally (and 2/3 in Massachusetts).

• Why are people still uninsured? Three main reasons:

  1. The law doesn't apply to undocumented immigrants (about a quarter of the uninsured).

  2. The mandate has exemptions (e.g., for those below the poverty line or for whom insurance is still unaffordable).

  3. The penalty is a tax, and some people prefer to pay it rather than buy insurance.

• Political Challenge: This three-part solution is more complicated to explain than simple alternatives like "single-payer." While it was a major step forward, it hasn't solved the access problem entirely, leaving an ongoing debate, particularly within the Democratic party, about whether to push for single-payer.

30:30 - 45:00 The Cost Problem

• Two Contradictory Facts:

  1. It's been worth it: Health care spending has quadrupled since 1950, but the improvements in health outcomes (e.g., lower infant mortality, better heart attack and knee surgery treatments) have been economically worth the cost.

  2. It's incredibly wasteful: An estimated one-third of all health care spending does nothing to improve health.

• The Core Challenge: The productive 2/3 of spending is so valuable that it makes the overall rise in costs seem worthwhile, but the unproductive 1/3 represents massive waste. The problem is that while we can identify waste in hindsight, it is extremely difficult to prospectively know which treatments will be effective and which will be wasteful.

• Two Potential Solutions to Control Costs:

  1. The Regulatory Path (European Model): Direct government control over the health care system through:

     • Technological Regulation: Rationing certain procedures (e.g., denying kidney transplants to people over 75).

     • Supply Regulation: Limiting the number of doctors, hospitals, and machines (e.g., Canada has far fewer MRI machines).

     • Price Regulation: The government sets the prices for medical services. This is the most important method. The US is unique in letting the free market set most prices, which fails due to market imperfections like lack of information (you can't shop for a heart attack) and imperfect competition (monopoly hospitals or prestigious hospitals charging far more).

  2. The Incentives Route (ACOs): This approach, a key part of Obamacare, creates "Accountable Care Organizations" (ACOs)—groups of doctors and hospitals that work together. Instead of paying for each service, the government pays them a flat fee per patient to manage all of that person's care. The idea is to give them an incentive to be efficient. However, this approach has not worked well in practice, as providers struggle to figure out how to effectively manage care and costs within this system.

Here is a summary of the video from the 30:00 minute mark to the end (46:00):

30:30 - 41:00 The Cost Problem (Continued)

• Two Potential Solutions (Continued):

  • The Regulatory Path (European Model): This involves direct government control through:

    • Technological Regulation: Rationing certain procedures (e.g., denying kidney transplants based on age).

    • Supply Regulation: Limiting the number of doctors, hospitals, and machines (e.g., Canada has far fewer MRI machines, leading to long waits).

    • Price Regulation: The government sets the prices for medical services. This is the most important method. The US is unique in letting the free market set most private insurance prices, which fails due to market imperfections like lack of information (you can't shop for a heart attack) and imperfect competition (monopoly hospitals or prestigious hospitals like MGH charging far more due to a "reputational monopoly"). While Medicare successfully uses price regulation, applying it universally is politically difficult and has failed in the past (e.g., state-level attempts in the 1970s).

  • The Incentives Route (ACOs): This approach, a key part of Obamacare, creates "Accountable Care Organizations" (ACOs)—groups of doctors and hospitals that work together to provide all of a patient's care. Instead of paying for each service, the government pays them a flat fee per patient to manage all of that person's care. The goal is to give them an incentive to be efficient and control costs. However, this approach has not worked well in practice, as providers struggle to figure out how to effectively manage care and costs within this system.

• Why This Matters: Health care costs are the single most important government fiscal problem. The US faces a long-term deficit of roughly $75 trillion, and $70 trillion of that is driven by health care costs. Controlling costs is as critical an issue for the future as climate change.

41:00 - 46:00 Course Conclusion

• The Goal of the Course: Professor Gruber explains that the purpose of 14.01 is not to memorize formulas, but to:

  1. Spark an interest in economics.

  2. Make students more educated consumers of news and policy, especially in an era where facts and the scientific method are under attack.

• The Economist's Job: He concludes with a joke about a doctor, a priest, and an economist who are rude to a slow, blind golfer. While the doctor and priest pledge charitable acts to atone, the economist asks, "If he's blind, why doesn't he just play at night?" The point is that the economist's job is to be "annoying"—to question basic assumptions, find logical flaws in arguments, and think critically about problems to find responsible solutions.