Pegging

Pegging is not something from a prison movie, a Deadpool 2 joke, nor a global currency management strategy that grew out of Bretton Woods.

Instead, PEG actually stands for price-to-earnings-to-growth, and the term refers to when shareholders get paid back for taking risk in buying a high multiple (i.e. high price-to-earnings ratio) stock.

So...let's say you have a stock trading at 10 times earnings, where earnings should be flat the next decade. Well, you have 10 years to get all your money back, including dilution from stock options and other weird things that happen along the way. The PEG payback period is 10 years.

The reason that the PEG Payback Period even became a Thing is that, in bubbles, where companies are growing 100% a month for a while, investors pay 300x earnings or more, and that "insane" multiple makes old geezers scratch their heads and laugh about how stupid the investors are who are paying such a high multiple.

Well, Yahoo came public in the mid '90s at a valuation of about $260 million. It had $1 million in notional (i.e., kinda made up with a wink) earnings. So yes, it came public at 260x earnings. Insane, right? Well, in hindsight, just 3 years later it had earnings of about $260 million. So yes, it came public at 1 times 3 year forward earnings. Only one times earnings. How cheap is that? Well, you need to have a bit of vision, a bit of faith, hope, and of course prayer helps. But think about how all the old people who laughed at the Yahoo IPO as insanely expensive felt after the stock went up 300 times in value in 6 years? Yeah, take that, naysayers.

Anyway, the PEG Ratio series is all about rationalizing "insane" valuaitons with "insane growth," as some crazy, growthy things have happened in this internet era. Would anyone have guessed that the ant named Amazon in 1995 would end up destroying Walmart? Well, Jeff did. Not sure who else though.