Not All Growth Is Equal: The Anatomy of a 10x Valuation
Why some companies command premium multiples—and how to spot them before everyone else does
There’s a recurring mistake even seasoned investors make: treating all revenue, all growth, and all earnings as interchangeable. Two businesses may show the same revenue growth on a chart, but underneath that line may lie two very different engines—one destined for the 10x club, the other quietly fading into irrelevance.
Just as Bill Gurley argued that not all revenue is created equal, I’d argue the same for growth itself. In an environment flooded with capital, AI narratives, and fleeting infatuations, it’s never been more important to discriminate—to know not just that a company is growing, but why, how, and how defensibly.
This post is about understanding the anatomy of premium multiples—how companies like ServiceNow, FICO, or CrowdStrike can trade at EV/Revenue multiples that look absurd at first glance, yet turn out to be bargains in hindsight. And more importantly: how to recognize those characteristics before the market fully does.
The 5 Characteristics of High-Quality Growth
Let’s unpack five dimensions that separate durable compounders from growth mirages. None of these are new, but the real insight is in their intersection.
1. Gross Margin as a Proxy for Strategic Power
If growth is the car, gross margin is the engine type. Is it a gas-guzzling hardware business or a Tesla-like software flywheel?
Gross margin doesn’t just reflect accounting efficiency. It reflects leverage—how much value a business captures relative to what it costs to deliver. Consider this:
FICO’s gross margin is north of 80%, driven by a proprietary scoring algorithm embedded in the credit ecosystem.
BYRN, despite high growth in consumer self-defense, sits closer to 60%—manufacturing-dependent and more commoditized.
The difference? One scales like code, the other like inventory.
Investor takeaway: Favor businesses where gross margin expands with scale. If higher revenue improves economics (not worsens them), you’re in compounding territory.
2. Recurring Revenue: Predictability Is a Valuation Force Multiplier
The market loves predictability. ARR (Annual Recurring Revenue) isn’t just a metric—it’s a psychological safety net for investors.
Not all recurring revenue is created equal, either:
Is it contractual (multi-year SaaS)?
Is it behaviorally sticky (like FICO scores or Visa swipe fees)?
Or is it just hope dressed up as retention?
ServiceNow (NOW) thrives here. Over 97% of its revenue is subscription-based, driven by enterprise-grade contracts. Customers aren’t signing up on a whim—they’re integrating “Now” workflows into critical systems. That level of stickiness is hard to unwind.
Behavioral Recurrence (FICO, Visa, Intuit). There’s no contract, but usage is habitual. FICO scores are baked into lending decisions. Visa rails are the default. Consumers renew TurboTax every year out of habit. These businesses benefit from invisible gravity: distribution power, switching costs, and consumer inertia. Revenue recurs not by force, but by familiarity.
Industrial or OEM Dependency. Revenue recurs only if demand recurs. Aspen (ASPN) supplies thermal materials to EV makers. Contracts are multi-year and the product is embedded, so it looks recurring. But it depends on customer order volumes, which are lumpy and tied to external forces (EV demand, factory ramp-ups). It’s recurring revenue with a cyclical heart—and the market knows it.
Investor takeaway: Ask not just “is it recurring,” but “how hard is it to stop paying?”
3. Customer Acquisition Efficiency: CAC Payback and Beyond
Some businesses grow by brute force—burning through capital to acquire users. Others grow through gravitational pull.
The best companies turn CAC (Customer Acquisition Cost) into an asset, not a cost:
CrowdStrike (CRWD) is a textbook example of customer acquisition done right. Its go-to-market model, while sales-led, has evolved into a scalable ecosystem—leveraging channel partners, MSSPs, and AI-assisted onboarding to drive cost-effective growth. With a CAC payback period typically under 24 months and net revenue retention (NRR) consistently above 110%, CrowdStrike spends once and monetizes for years. Customers typically begin with endpoint protection, then expand into adjacent modules like identity, cloud security, and threat intelligence—deepening platform adoption with minimal incremental sales effort. The result is a business where each cohort becomes more valuable over time, fueling both revenue growth and margin expansion.
Blue Apron (APRN), by contrast, is a cautionary tale. It too operated on a subscription model, but one with a leaky bucket. Despite strong initial demand, Blue Apron spent over $400 to acquire customers who, on average, generated less than $300 in lifetime gross profit—despite strong initial demand. Churn regularly exceeded 60% within six months, and there was no path to upsell or expand revenue per user. Without stickiness, each dollar of CAC became a sunk cost. Unlike CrowdStrike’s compounding cohorts, Blue Apron had to re-acquire its revenue base constantly, making scale a liability rather than an asset. In the end, growth without retention proved fatal—culminating in a fire-sale acquisition after years of value destruction.
Investor takeaway: Study CAC payback periods and NRR in tandem. Great businesses spend once and monetize for years.
4. Moat Depth and Expansion: Can They Raise the Toll Over Time?
Everyone talks about moats. Few ask how deep they really are—or whether they’re expanding.
Does the product improve with usage (network effects)?
Is there a switching cost (data, workflows, contracts)?
Can they layer on new products (multi-SKU expansion)?
CrowdStrike is building a moat with data gravity and breadth. The Falcon platform benefits from telemetry across trillions of events weekly. More data means better detection, which in turn means better outcomes—feeding into a self-reinforcing loop. With almost 30 modules and a platform approach to security, they’re not just protecting endpoints—they’re becoming the nerve center of enterprise defense. This multi-product expansion is critical: customers with ≥6 modules are growing fast and churning less.
DocuSign dominated e-signatures, riding a wave of digital transformation through the 2010s and exploding during the pandemic. For a while, it felt like a moat: contracts embedded in legal workflows, integrations with enterprise systems, strong brand recognition. But beyond the core product, the company struggled to deepen its advantage. There were limited switching costs—customers could (and did) shift to Adobe Sign, HelloSign, or even native Microsoft integrations with minimal friction. The product didn’t get better with usage—there was no network effect, no compounding data advantage, and no expanding utility beyond basic document execution.
Investor takeaway: Look for businesses where existing customers spend more over time and competitors find it increasingly hard to catch up.
5. Free Cash Flow Conversion: Growth That Funds Itself
Free cash flow is the scoreboard. It reveals whether a business can grow without endlessly tapping the equity. And over the past decade, few companies have done this better than ServiceNow.
ServiceNow’s free cash flow margin has climbed steadily from 22.9% in 2015 to over 32% today, with remarkable consistency since 2020. What’s just as important is how they achieved it: through operational scale, not excessive dilution. Stock-based compensation as a percentage of revenue has dropped from 25.6% in 2015 to just 15.6% TTM, showing a decade-long trend of discipline. ServiceNow has become a rare enterprise software platform that grows fast, expands its product suite, and still returns meaningful cash to shareholders—all without watering down ownership.
UiPath tells a different story. While it has posted a 21.6% FCF margin over the trailing twelve months, the road there has been volatile. As recently as 2020, its FCF margin was –111.6%, and it stayed negative through 2022. SBC remains elevated at 23.8% of revenue, despite trending down from a peak of 57.8% in 2021. UiPath is clearly improving, but it’s still transitioning from growth-at-all-costs to sustainable profitability. Investors should watch whether this momentum continues—or if free cash flow proves episodic rather than structural.
Investor takeaway: Track two levers together—FCF margin and stock-based comp. Companies like ServiceNow are graduating into self-sustaining engines. Others, like UiPath, are still proving they can grow without selling pieces of the future.
The Compounding Power of the 10x Framework
Let’s do a simple exercise. Imagine two businesses, both growing revenue at 30% annually. But one has:
85% gross margins
115% NRR
12–18 month CAC payback
<5% churn
30% FCF margin
The other? None of the above.
Would you pay the same multiple for both?
Of course not. Yet many investors do—particularly in bull markets where momentum masks fundamentals.
What we want is asymmetry: businesses that look expensive on next year’s revenue, but cheap on next decade’s cash flow.
That’s where the 10x revenue club lives.
How to Use This Framework
This isn’t just theory. It’s a filter—a way to cut through noise and prioritize research:
When I research new names for my portfolio, I score them across these five dimensions.
If a stock drops 30%, I don’t ask “Is it cheap?” I ask: “Has the growth quality changed?”
I revisit old ideas not when the price moves—but when any of the five levers move.
Final Thought: The Market Eventually Cares
In the short term, narratives dominate. But in the long term, the market returns to fundamentals like a pendulum.
10x revenue multiples aren’t given. They’re earned—through structural advantage, operational discipline, and long-term alignment.
So next time you see a high-multiple stock, don’t dismiss it out of hand. Ask:
Is this a premium valuation?
Or a discount on a dominant future?
Not all growth is equal. And the best investors learn to tell the difference before everyone else does.