A bit ashamed to say that I am still a bit confused how growth stocks actually produce their returns for their shareholders over time. More specifically the actual mechanics of it. Please bear with me:
Let's say you buy one stock of a tech company today at t=0 at a rather high 1yr forward P/E ratio. Now fast forward one year to t+1. Suppose the earnings announced at t+1 are exactly those implied by 1yr forward P/E ratio a year ago at t=0.
At t+1 we realized one year of earnings. The remaining future earnings are unchanged minus what we just realized at t+1. Basic algebra tells me that stock price should appreciate by the difference in value of all discounted future earnings at t=0 and t+1.
If we look at classicvaluation, in % terms that difference is the discount rate or cost of equity. That stock's market price should appreciate by the cost of equity of that tech firm = risk-free rate + beta x equity risk premium.
Is my thinking correct?