X is trading at 23x Forward P/E, while historical averages are in the range of 17.3x to 23.1x. That being said, equity multiples are dynamic and may expand or contract if business conditions change. In the case of X, we think the multiple expansion makes sense mainly because growth has accelerated in recent years, while the EBIT margin also expanded from 56% five years ago to 77% now. As a result, the multiple should naturally expand given this meaningful improvement. In addition, one of the necessary skills for investors to own compounders/ high-quality businesses is to get comfortable with valuations which they could get slightly ahead of themselves occasionally, as great businesses are rare. We think the common mistake investors make is selling great businesses too soon.
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