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At Sands Capital, we look at valuation through a long-term lens informed by deep research and careful analysis.
For many investors, valuation is the starting point. A multiple flashes on the screen. A target price is set. A stock is labeled expensive or cheap. The conclusion often follows quickly.
At Sands Capital, we begin somewhere else.
Valuation matters deeply to us. It is one of our six core investment criteria. But it is intentionally the sixth. Not because it is less important, but because we believe valuation only has meaning when placed in the context of the business itself.
We seek to understand the enterprise before we assign a price to it.
Business First, Valuation in Context
Since our founding in 1992, our six criteria have become an integral part of how we execute our investment strategy.
The first five focus on the essence of a company. Is it capable of sustainable, above-average earnings growth? Does it hold a leadership position in a promising business space? Does it possess a significant competitive advantage? Is its mission clear and value added? Does it exhibit focus and financial strength?
These questions require deep research and long-term thinking. We analyze industry structure, competitive moats, management quality, and the durability of growth. We think in five-year increments and beyond.
Only after that work do we turn to valuation.
We believe price cannot be assessed in isolation. A multiple detached from duration, competitive strength, and reinvestment opportunity tells an incomplete story. A company inflecting into a longer runway of growth may appear expensive on near-term metrics. Yet if the earnings trajectory is materially improving, that initial impression can prove misleading.
In hindsight, some of the most compelling investments of the past decade rarely looked optically cheap at the moment of purchase. They looked expensive relative to the present. They proved reasonable relative to the future.
Expected Return, Not Target Price
We do not anchor on a valuation multiple. Instead, we evaluate each holding through an expected return framework.
For every company we own, we build a multi-year model. We forecast revenue, margins, reinvestment needs, and ultimately earnings power several years into the future. We do apply a terminal multiple estimate, which helps us estimate the future value of a business by applying a reasonable market multiple to its expected financial results. This is often conservative and assumes contraction over our ownership period. From that foundation, we estimate an annualized return over a five-year horizon.
Historically, our portfolio has been constructed with an average expected return in the mid-teens on an annualized basis. Over five years, that implies the potential to double capital. That is the standard against which we measure opportunity.
When a stock appreciates and approaches a level that we believe could be of concern, we revisit the model. Has the business improved? Have revenues accelerated? Has the margin structure strengthened? Has the competitive position widened?
If so, our forward estimates may rise. The expected return may remain attractive even at a higher price. In that case, we may continue to hold.
If the stock price runs well ahead of the fundamental trajectory and compresses the forward return below our hurdle, we may trim or exit. The decision is grounded not in where the stock has traded, but in what we believe it can deliver from this point forward.
Valuation Within Portfolio Construction
Valuation is also managed at the portfolio level.
We do not construct portfolios comprised solely of early-stage, high-growth companies with elevated multiples. Nor do we limit ourselves to mature, steady compounders. We invest across the growth curve.
Some holdings may be emerging leaders growing revenue at 30 percent or more, reinvesting aggressively to capture market share. Others may be scaled platforms with durable competitive advantages and still attractive, if more moderate, growth rates.
This balance allows us to express conviction while closely observing earnings at the portfolio level. It also reflects our belief that value creation can occur at different stages of a company’s evolution.
Valuation, in this context, is not a single number. It is a function of growth duration, competitive advantage, and capital allocation discipline, considered across the entire portfolio.
Investing Before Profitability
A frequent question concerns unprofitable companies. How do we value a business that has yet to generate earnings?
We begin with unit economics and long-term margin structure. What does profitability look like at scale. Are gross margins attractive? Is customer acquisition cost rational relative to lifetime value? Does the business model improve as it grows?
We are willing to invest before reported profitability if we believe the path to durable earnings power is clear and supported by evidence. In these cases, near-term price behavior can be volatile. Stocks without current earnings often trade on sentiment as much as fundamentals.
Our task is to remain anchored to the underlying trajectory. If revenue growth, customer adoption, and competitive positioning continue to evolve as expected, short-term price swings do not alter the long-term thesis.
The Discipline to Resist Narratives
Market environments can at times distort valuation frameworks. Periods of enthusiasm around themes such as artificial intelligence can lead to rapid multiple expansion. At other times, fear can compress valuations indiscriminately.
We do not attempt to predict sentiment cycles. We return instead to our models and our criteria.
Is the company strengthening its leadership? Is it extending its competitive moat? Is the addressable market expanding? Does the expected return from today’s price justify the risk?
By grounding valuation in fundamental analysis rather than narrative, we aim to maintain discipline when the market’s tone shifts.
Valuation as a Tool, Not a Trigger
Valuation, for us, is neither a screening device nor a mechanical sell signal. It is a tool for allocating capital thoughtfully.
We do not dismiss a business because it appears expensive on a near-term multiple. Nor do we assume that a low multiple guarantees safety. We seek to understand a company’s earnings power several years out and the probability of achieving it.
When we get the business right, when we understand the trajectory of revenue, margins, and competitive advantage, we believe the stock price will, over time, reflect that reality.
In that sense, valuation is inseparable from philosophy. It requires patience, rigor, and a willingness to look beyond the present quarter. It requires conviction built on research.
At Sands Capital, we are not seeking the lowest multiple. We are seeking attractive long-term returns from exceptional businesses. Valuation is how we measure that opportunity, but it is the quality and durability of the enterprise that ultimately determines the outcome.
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change.
This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results.
All investments are subject to market risk, including the possible loss of principal. Recent tariff announcements may add to this risk, creating additional economic uncertainty and potentially affecting the value of certain investments. Tariffs can impact various sectors differently, leading to changes in market dynamics and investment performance.
References to “we,” “us,” “our,” and “Sands Capital” refer collectively to Sands Capital Management, LLC, which provides investment advisory services with respect to Sands Capital’s public market investment strategies, and Sands Capital Alternatives, LLC, which provides investment advisory services with respect to Sands Capital’s private market investment strategies, which are available only to qualified investors. As the context requires, the term “Sands Capital” may refer to such entities individually or collectively. Sands Capital refers to the combination of Sands Capital Management, LLC, Sands Capital Alternatives, LLC, and Sands Capital Horizons, LLC. All three firms are registered investment advisers with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. The three registered investment advisers share certain personnel, office space, and other resources.
This communication is for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for, or issue any securities. The material is based on information that we consider correct, and any estimates, opinions, conclusions, or recommendations contained in this communication are reasonably held or made at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, or recommendations. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.
Notice for non-U.S. Investors.