Base Value vs Froth
Split any price into the part backed by earnings and the part backed by expectation. The base is what a private buyer would pay; everything above it is froth — and froth is what a de-rating removes, with earnings completely unchanged.
Price change on de-rate
—
earnings unchanged
Earnings growth needed
—
to hold the price at the lower PE
Years at 15% growth
—
to grow back into the old price
—
On the base multiple. The 6–8× default comes from private-company transactions — what a buyer pays for the whole business, with no liquidity, no index inclusion and no story attached. That is the honest floor of a valuation, and the gap between it and the listed multiple is the part of your position that depends on other people continuing to feel the same way. This is a lens for sizing the risk in a price, not a target: a company can trade above its base multiple for years, and a great business genuinely deserves a higher one.