Why would a company with similar growth and profitability to its Comparable Companies be valued at a premium?
Answer
This can happen for a number of reasons. Could be hype around the stock based on recent performance, it could be a competitive advantage, etc.
Let’s use Netflix as an example vs. HBO. Let’s say that they had similar financial profiles, but HBO was trading much higher. Personally, HBO has at least 2x better content than Netflix, and if the public agrees with me, HBO could be projected to have more longevity and a more stable user base which would raise value. Also, in this case they would have the better product, which would enable them to charge more and therefore increase their revenue per customer relative to peers.
Why this matters to bankers
Context is everything when choosing Comparable Companies. Part of that is understanding what drove a higher or lower valuation and using that to guide the analysis of your client.