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When I think about evaluations, I stumble across the same abbreviation again and again. A single multiple is singled out and a judgment is derived from it. High value equals expensive, low value equals cheap. That doesn't work for me. Multiples are not labels, but condensations of expectations. They reflect what the market thinks about growth, stability, risks and the quality of future cash flows. This is precisely why they change over time.
For me, multiple expansion is not an end in itself and multiple contraction is not a warning signal by definition. Both are reactions to changing assumptions. Sometimes these assumptions are well founded, sometimes they run ahead of the fundamentals. The crucial point for me is always the same question: has the risk/return ratio actually changed or are we mainly seeing a shift in sentiment?
When multiples rise, I first look beneath the surface. Has the return on capital improved? Have cash flows become more predictable? Is the business model more robust than before? If I can see clear progress here, I consider a higher valuation to be logical. If not, I become cautious. Then the market is paying less for substance than for hope.
One example where I see a structurally clean multiple expansion is $MSFT (-0,79%) (Microsoft). Microsoft has long been perceived as a mature software company. The transition to the cloud has changed this image. Not only has growth picked up, but above all the quality of revenue has improved. Recurring revenues, high scalability and increasing returns on capital have meant that the market is now willing to accept higher multiples than a decade ago.
A different picture shows $V (-2,03%) (Visa). Visa is not growing spectacularly, but extremely reliably. High margins, low capital commitment and very stable cash flows characterize the business model. The fact that the share is permanently trading at a higher valuation level than many other financial stocks is for me less a growth bet than an expression of confidence in this stability.
Multiple contraction, on the other hand, is often interpreted as a sign of weakness. A look at $GOOGL (+0,69%) (Alphabet) shows that this is not necessarily true. Alphabet has long been valued with very high growth assumptions. With increasing size and stronger regulatory pressure, these assumptions have shifted. I read the lower multiples of recent years more as a normalization of expectations. The operational quality of the company remains high.
Against this background $ASML (+0,56%) (ASML Holding) is a particularly interesting example for me.
ASML is operationally one of the strongest industrial companies in the world. Its technological position is exceptional, its products are indispensable for modern chip production, its margins are high and its order backlog is well supported in the long term. There is no question in my mind that ASML must be valued differently today than a classic cyclical equipment manufacturer. Some of the multiple expansion in recent years is therefore understandable and, in my view, justified.
However, the recent share price increase adds a second layer. In addition to the structural revaluation, I currently see very high expectations for the future. AI-driven demand, sustained high investment cycles and low cyclicality are strongly priced in. My problem with this is not that these assumptions are fundamentally wrong. My problem is that they leave little room for disappointment.
Classic fair value considerations, whether using historical valuation bands or cash flow models, indicate that ASML is currently quoted at the upper end of a fair valuation range. For me, this does not mean that the share is irrationally valued. It means that a large part of the expected quality is already in the price. In such an environment, a slight slowdown in order intake or margins is often enough to put pressure on the multiple, even without an operational crisis.
This is where I draw the line between structural multiple expansion and valuation overstretch. ASML remains an extraordinary company. However, the share currently requires a great deal of operational discipline. This is not a selling point, but a clear signal to be cautious about new investments.
What I take away from this section is one thing above all: valuations cannot be viewed in isolation. Multiples only tell a meaningful story if you read them in the context of expectations, risk and the market environment.
This is exactly where the next part comes in. In Part 6, I will look at how market phases typically develop - from build-up to acceleration and euphoria through to the top. The aim is to classify market movements over time.
