High Flier: Understanding Companies with Skyrocketing Valuations
Explore the concept of high flier companies—those experiencing rapid valuation growth compared to their peers—and learn how to assess their sustainability in today's market.
Katrina Ávila Munichiello brings over fourteen years of expertise as an editor, writer, fact-checker, and proofreader, contributing to both print and digital media.
What Defines a High Flier Company?
A "high flier" is a term used to describe a company whose valuation has surged dramatically relative to its industry counterparts. Typically, these companies exhibit rapid growth reflected in valuation metrics such as an elevated price-to-earnings (PE) ratio.
Sometimes, the label carries a cautious or skeptical tone, questioning whether such rapid growth is sustainable over time.
Key Insights
- "High flier" colloquially refers to companies with exceptionally high market valuations.
- The term can imply overvaluation, signaling potential risks.
- High fliers have long been part of the stock market landscape, often sparking lively discussions among investors.
Mechanics Behind High Fliers
Throughout market history, certain stocks outperform others significantly. For example, during the late 1990s, internet-related companies experienced explosive valuation growth compared to traditional industries. Similarly, firms like Warren Buffett's Berkshire Hathaway (BRK) have demonstrated consistent, impressive growth surpassing general market trends.
In some contexts, "high flier" suggests that a company's success may stem from unsustainable factors such as speculative bubbles. This was evident during the dotcom bubble, where many high fliers eventually faltered, though some endured and thrived.
Investors skeptical of high valuations often scrutinize fundamental metrics like earnings per share (EPS) or book value to assess true worth.
To evaluate whether a high flier's performance is sustainable, investors utilize various analytical tools, including financial ratios like PE, price-to-book (P/BV), price-to-free-cash-flow (P/FCF), as well as valuation methods such as discounted cash flow (DCF) and reproduction value analysis.
Contemporary Examples of High Fliers
By the end of 2020, technology giants dominated the stock market's valuation hierarchy. The top five out of six largest companies by market capitalization hailed from this sector: Microsoft (MSFT) at approximately $1.36 trillion; Apple (AAPL) around $1.29 trillion; Amazon (AMZN) near $1.23 trillion; Alphabet (GOOG) at $919 billion; and Meta (META), formerly Facebook, at approximately $584 billion.
While these companies boast massive market caps, their average PE ratio hovers around 41 based on trailing twelve months (TTM) earnings, which is notable but not extreme compared to the S&P 500's cyclically adjusted PE ratio of just over 30 as of January 2020.
Restricting the term "high flier" to companies with both substantial market caps (above $50 billion) and high PE ratios reveals a different group. This includes Advanced Micro Devices (AMD) with a PE near 120; Zoom Video Communications (ZM) with a PE around 269; and Netflix (NFLX) with a PE slightly above 80.
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