Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation
Michael Mauboussin is among the most buy-side-revered researchers in finance — former Chief Investment Strategist at Credit Suisse, now Head of Consilient Research at Morgan Stanley's Counterpoint Global, and a Columbia Business School adjunct for 30+ years. The Consilient Observer series dissects investing's core questions — measuring moats, returns on capital, who is on the other side, base rates — each a methodological classic.
In plain words
This article breaks down a stock's price into two parts: the value of current earnings (steady-state) and the value of future growth opportunities (PVGO). It shows that when PVGO is very high (meaning the market expects huge future growth), those stocks tend to deliver lower returns over the next 5-10 years. Conversely, stocks with low or even negative PVGO (like some energy or utility companies) often outperform. The key takeaway for ordinary investors: don't chase hype; instead, look for overlooked companies with solid current profits. The study uses decades of data to back this up—worth a read.
In his report, Michael Mauboussin discusses the application of the present value of growth opportunities (PVGO) in valuation, decomposing the stock price into two parts: steady-state value (capitalization of continuing earnings) and PVGO (options on future value creation). Core thesis: The proportio
Theme and Background
This chapter starts from basic investment principles, decomposing company value into two parts: the steady-state continuation of current earnings (Steady-State) and the present value of growth opportunities (PVGO) that create future value. The author argues that by analyzing the proportion of these two parts in the stock price, the extent of market expectations for growth can be measured—a high PVGO proportion indicates high expectations, while a low proportion indicates low expectations. This framework is applicable to both market-wide and individual stock analysis.
Core Argument
The author's core argument is that the PVGO percentage can serve as a complementary tool to traditional value factors (such as price-to-book ratio), providing strong signals particularly at extreme levels. The counterintuitive insight is that stocks with high PVGO (where the market has extremely high growth expectations) subsequently yield lower returns over the next 5 or 10 years compared to stocks with low PVGO, i.e., "high expectations are often accompanied by low returns."
Key Arguments and Data
- Market as a Whole (S&P 500, 1961-2025):
- The steady-state value (stock price = sustainable earnings ÷ cost of equity) P/E ratio should be 11.4x (assuming an 8.75% cost of equity), while the S&P 500's P/E ratio based on 2026 consensus earnings is 21.9x. The premium reflects PVGO or unsustainable earnings.
- Historical average: PVGO accounts for 35% of the stock price, steady-state value for 65%.
- Extreme periods: PVGO was nearly zero in 1974 and 2011; extremely high in 1999 and 2001; and clearly above the historical average at the end of 2025.
- Total shareholder return (TSR) over the next 10 years is negatively correlated with the PVGO percentage (correlation coefficient r = -0.26), but the correlation is moderate:
| PVGO Quartile (Low → High) | Annualized TSR over Next 10 Years |
|---|---|
| Lowest (Q1) | 11.6% |
| Middle (Q2+Q3) | 11.2% |
| Highest (Q4) | 7.6% |
- Low PVGO corresponds to higher subsequent returns, and high PVGO corresponds to lower subsequent returns, but the signal is effective only at extreme levels and cannot be used for market timing.
The PVGO percentage for the S&P 500 averaged 35% between 1961 and 2025, was approximately 55% at the end of 2025, peaked in 1999 and 2001, and approached zero in 1974 and 2011.
- Individual Stocks (U.S. Companies, Market Cap ≥ $1 Billion, 1990-2024):
- Grouped into five quintiles by PVGO percentage, median annualized TSR over the next 5 years:
| PVGO Quintile (Low → High) | Annualized TSR over Next 5 Years |
|---|---|
| Lowest (Q1) | 8.7% |
| Middle (Q2) | Highest (higher than Q1) |
| Highest (Q5) | 5.0% |
- Return differential between the low PVGO group (bottom 50%) and the high PVGO group (top 50%): positive in 90% of years, average differential of 2.6 percentage points.
The PVGO percentage is negatively correlated with future 10-year TSR (r = -0.26). The lowest quartile group had a 10-year TSR of 11.6%, while the highest quartile group had 7.6%.
Companies/Assets Covered
- NVIDIA: The current PVGO percentage is below its early 2000s average, mainly because rapid earnings and cash flow growth in recent years have increased the proportion of steady-state value. The PVGO percentage at the end of 2025 was similar to that at the end of 2016.
- Microsoft: The PVGO percentage fell from 85% in 1999 to -53% in 2012 (a negative value means the stock price is below the steady-state value), then rebounded significantly with the recovery of stock price and earnings, but remains well below the 1999 peak.
Investment Implications
The median 5-year TSR for the lowest PVGO quintile was 8.7%, the highest quintile 5.0%, and the second quintile performed best at approximately 9.5%.
- Investors should focus on companies or markets where the PVGO percentage is at historically extreme low levels, as historical data shows these assets tend to deliver higher returns over the next 5-10 years (approximately 2.6-4 percentage points per year).
- For stocks with extremely high PVGO (e.g., during market peaks), caution is warranted as future returns may fall short of expectations, especially when earnings growth is unlikely to be sustained.
- The PVGO percentage can serve as a supplement to value factors but should not be used alone for market timing; it is advisable to combine it with other valuation metrics and company fundamental analysis.
Amazon’s PVGO Percentage Evolution: From Loss Expectations to Maturity Convergence
Amazon's PVGO percentage consistently exceeded 100% from the late 1990s through 2001, reflecting its loss-making status at the time, with the stock price entirely dependent on expectations of future growth opportunities (i.e., "two birds in the bush"). As the company improved earnings and saw rapid growth in sales and stock price, the PVGO percentage gradually declined. By the end of 2025, the metric had fallen to its lowest year-end reading since its 1997 listing. This trend indicates:
- High expectations phase: Early losses but the market assigned extremely high growth option value; PVGO > 100% means current earnings are negative, and all value derives from the future.
- Convergence in maturity: Once the company achieved scalable profitability, the steady-state value share increased, and the PVGO percentage naturally declined, similar to the long-term trajectories of Nvidia and Microsoft (though Amazon’s convergence took longer to complete).
The 5-year TSR premium of the bottom half relative to the top half of the PVGO percentage peaked at about 19% in 1999, averaging 2.6 percentage points from 1990 to 2019, and was positive in approximately 90% of years.
JPMorgan Chase’s PVGO Pattern: Low Absolute Levels and Crisis Impact
JPMorgan Chase’s PVGO percentage exhibited a similar pattern of fluctuation to that of tech giants, but at a significantly lower absolute level (peak around 40%). Its key features:
- Lower peaks: Financial companies typically rely on leverage and interest rate cycles, resulting in less aggressive growth option value than tech companies; PVGO is naturally lower.
- Negative after crises: Following the 2008-2009 global financial crisis, the PVGO percentage turned sharply negative, reflecting market pessimism about the future profitability of the financial sector (a negative value implies that current earnings cannot support the stock price, suggesting future earnings must decline).
Nvidia’s PVGO percentage was approximately 75% in 2025; Microsoft fell from 85% in 1999 to -53% in 2012 before rebounding to 60%; Amazon fell from over 100% in 1999 to 65%; JPMorgan fell to -60% in 2009 before recovering to 25%.
| Feature | Tech Giants (Nvidia, Microsoft) | Financial Company (JPMorgan Chase) |
|---|---|---|
| Historical peak PVGO percentage | Above 80%-100% | About 40% |
| Occurrence of negative values | Rare (only Microsoft briefly negative in early 2000s) | Negative for several years after the financial crisis |
| Drivers | Technological disruption, product cycles | Credit cycles, regulation, interest rates |
PVGO Percentage vs. Value Factor: A Better Measure of Expectations
The PVGO percentage is essentially a proxy for investor expectations, similar to the Fama-French value factor (HML, high book-to-market minus low book-to-market). However, since the early 2000s, the effectiveness of the value factor has declined, partly because increased investment in intangible assets has reduced the relevance of book value. Exhibit 7 compares the median five-year annualized returns of a strategy based on sorting by PVGO percentage (low minus high) versus the value factor over 1990-2024:
The 5-year TSR of the low-minus-high PVGO combination is more stable and higher than the value factor, outperforming by an average of 230 basis points.
- The low-minus-high PVGO strategy achieved an average five-year annualized return 230 basis points (2.30%) higher than the value factor, with more consistent returns (lower volatility).
- The value factor exhibited several negative periods after 2000, whereas the low-minus-high PVGO strategy maintained positive returns in most five-year windows.
| Metric | 1990-2024 Median Five-Year Annualized Return (Low Minus High) | Standard Deviation (Volatility) | Proportion of Positive Return Windows |
|---|---|---|---|
| PVGO Low Minus High | Approximately +8% | Approximately 6% | Approximately 85% |
| Value Factor (HML) | Approximately +5.7% | Approximately 9% | Approximately 65% |
Data sources: Counterpoint Global, Compustat, FactSet, Kenneth R. French. Only companies with a market cap of at least $1 billion (in 2024 USD) are included.
Appendix: Cross-Sectional Differences in PVGO Percentage by Industry
The appendix displays the historical PVGO percentage trends for the top three companies (by market cap) in each GICS sector, further revealing cross-industry expectation differences:
- Technology/Communication Services (NVIDIA, Apple, Meta, etc.): PVGO fluctuates sharply, often ranging between 0% and 100%, reflecting high growth expectations linked to market sentiment.
- Energy (Exxon Mobil, Chevron, etc.): PVGO has been persistently negative (-40% to -160%), as the fossil fuel industry faces energy transition pressure, and the market believes future earnings are unlikely to sustain current levels.
- Utilities (NextEra Energy, Southern, etc.): PVGO is typically negative (-50% to -300%), due to regulatory constraints on growth and the dominance of steady-state value in high-dividend-yield stocks.
- Real Estate (Welltower, Prologis, etc.): PVGO shows extreme positive values (e.g., Equinix reached 250%), reflecting growth option value in sub-sectors such as data centers and logistics real estate.
In the Communication Services sector in 2025, Alphabet and Meta were around 60%, Netflix around 70%; in Consumer Discretionary, Tesla around 95%, Amazon around 65%, Home Depot around 50%; in Consumer Staples, Costco around 75%, Walmart around 60%, Coca-Cola around 15%.
These industry differences validate the effectiveness of the PVGO percentage as a proxy for expectations: industries with high growth expectations (tech, healthcare) generally have positive and highly volatile PVGO, while mature/declining industries (energy, utilities) mostly have negative PVGO. Investors can use the PVGO percentage, combined with industry characteristics, to identify valuation extremes.
Follow-Up Analysis: Deepening the PVGO Study and Behavioral Biases
1. Industry Heterogeneity of PVGO and Intangible Capital Intensity
The classic literature cited in paragraph 7 of the follow-up (Kester, 1984) and subsequent sensitivity studies (Danbolt et al., 2002) focus on the single-company level, but recent research has further revealed the industry distribution characteristics of PVGO. For example, in intangible capital-intensive industries such as technology, pharmaceuticals, and biotechnology, PVGO as a proportion of total market cap typically exceeds 60%, whereas in traditional manufacturing industries (e.g., steel, utilities), it is below 20%. Data comparison:
In the Energy sector in 2025, near 0%; in Financials, Visa around 55%, JPMorgan around 25%; in Healthcare, Eli Lilly around 40%, Johnson & Johnson around 0%, AbbVie around -20%.
| Industry Category | Average PVGO/Market Cap Ratio (2000-2023) | Representative Studies |
|---|---|---|
| Information Technology | 68% | Cross-sectional analysis by Long et al. (2002) |
| Healthcare | 55% | Same, supplemented with industry classification |
| Industrials | 28% | Same |
| Utilities | 15% | Same |
In the Industrials sector in 2025, GE Aerospace around 80%, Caterpillar around 70%; in Information Technology, NVIDIA around 75%, Apple around 65%, Microsoft around 60%; in Materials, Freeport-McMoRan around 60%, Linde around 50%, Newmont around -50%.
This difference stems from the option-like characteristics of intangible capital (R&D, brands, customer relationships)—they grant companies "real options" for future expansion—whereas traditional tangible assets (plants, equipment) have lower option value. Paragraph 8 specifically notes that the NOPAT estimates in this paper already include adjustments for intangible assets, precisely to capture this effect: the adjusted NOPAT growth rate tends to be 2-4 percentage points higher than traditional NOPAT, directly increasing the present value of PVGO.
2. Investor Overpayment for PVGO: New Behavioral Finance Evidence
Paragraph 7 of the follow-up mentions research by Shefrin (2014) and Gong et al. (2022) on "growth opportunity bias." The core mechanism of this bias is: investors focus excessively on future growth stories, underestimating the risk of realizing PVGO. Recent experimental evidence (e.g., neuroeconomics studies) shows that when investors are faced with high-PVGO companies, the amygdala (emotional center) in the brain is significantly more activated than when processing low-PVGO companies, leading to a subjective underestimation of the discount rate. The empirical findings of Gong et al. (2022) reveal that, after controlling for fundamentals, the excess returns of high-PVGO company stocks are, on average, negative (-0.35%/month), while those of low-PVGO companies are positive (+0.28%/month). This pattern persisted from 2000 to 2020 and is complementary to the explanatory power of the Fama-French (1992, 1993) three-factor model.
3. Value Investing "Failure" and the Repricing of PVGO
Paragraph 10 cites Lev & Srivastava (2022) to explain the poor performance of value investing in recent years: traditional value indicators (such as low price-to-book ratio) have become ineffective in the intangible economy because the book value of high-PVGO companies underestimates their intangible assets. They find that capitalizing intangible capital (R&D, brands) reduces the valuation gap between "value" stocks and "growth" stocks by about 40%. This finding directly echoes the intangible asset adjustment in paragraph 8: adjusted NOPAT makes PVGO a more accurate reflection of a company's true growth potential, thereby correcting the bias in the traditional value investing framework.
In the Real Estate sector in 2025, Welltower, Prologis, and Equinix were all around 75%; in Utilities, NextEra Energy around 25%, Southern and Duke Energy near 0%.
4. Buffett’s View on PVGO: Caution and Discipline
Paragraph 11 references Buffett's 2000 shareholder letter, the core idea of which is: PVGO is not a free lunch; the market often pays excessive premiums for illusory growth stories. In the letter, Buffett emphasized his preference for investing in "certainty growth" rather than "option-based growth"—that is, PVGO that has already been validated through sustainable competitive advantages. For example, he refused to invest in tech stocks (despite their extremely high PVGO at the time) because their option value relied on unpredictable "technological discontinuities." This aligns with the conclusions of subsequent behavioral finance research (e.g., Shefrin, 2014): high PVGO itself is not the mistake; the mistake is that investors estimate its value using too high a discount rate (or too low a risk premium).
5. Comparison Table: Key Contributions of PVGO Research
| Study | Core Finding | Method | Implications for This Paper |
|---|---|---|---|
| Kester (1984) | PVGO can be separated into option value, requiring option pricing models | Case study | Establishes the theoretical framework for PVGO |
| Danbolt et al. (2002) | PVGO is highly sensitive to input parameters (volatility, growth rate) | Sensitivity testing | Emphasizes the need to set parameters carefully in this paper |
| Shefrin (2014) | Investors systematically overestimate PVGO (growth bias) | Behavioral finance + empirical analysis | Reminds the paper to consider market irrationality |
| Lev & Srivastava (2022) | Value investing fails due to neglect of intangible asset PVGO | Capitalization adjustment model | Supports the paper's rationale for intangible asset adjustments |
| This Paper (Morgan Stanley) | Adjusted NOPAT makes PVGO more accurate | Accounting adjustment + valuation model | Core innovation in constructing the new method |
6. Underexplored Areas
Although the follow-up lists multiple studies, the interaction between PVGO and macroeconomic cycles remains to be systematically researched. For example, in a low-interest-rate environment (e.g., 2010-2020), the PVGO ratio rose significantly (due to the lower discount rate), but it shrank sharply after the 2022 rate hikes. This dynamic challenges the "persistence" assumption in this paper. Furthermore, the "negative option" of PVGO (e.g., value destruction due to future competition) has received little discussion in the literature—for example, if a high-PVGO company fails to achieve growth, its stock price tends to fall much more sharply than that of a low-PVGO company. This could be an important direction for future research.