How can a company's competitive advantage be factored into its valuation?

To determine how a company's competitive advantage influences its valuation, considering the 75th percentile or higher for multiples is an effective approach. When a company has a strong competitive advantage, it typically commands premium valuation multiples compared to its peers. These multiples reflect the expected future growth, profitability, and overall market position of the company.

By focusing on the higher end of the multiples spectrum, such as the 75th percentile, investors and analysts can adjust their valuation to account for the company's unique strengths—like brand equity, cost advantages, or superior technology—expected to drive better performance than the average market participant. This approach recognizes that companies with a competitive edge are often valued more richly due to their potential to generate excess returns over time.

In contrast, using the 25th percentile for multiples or relying exclusively on median multiples would not adequately capture the additional value created by a competitive advantage. Similarly, applying a discount to projections could misrepresent the company’s true potential by undervaluing its strengths and prospects. Therefore, utilizing the 75th percentile or higher for multiples allows for a more accurate valuation that reflects the benefits of the company's competitive positioning.