 Good day, fellow investors. I recently analyzed a company, Visa, as I was going through a list of growth stocks, compounders, stock that constantly reinvest money and grow at a very high rate. Then I thought, okay, this video won't be just a Visa stock analysis. This video will be about a tool, the Delta of the Delta tool, how to analyze growth stocks. And you can apply this to pretty much each growth stock and then you can see, okay, what is the risk and reward for investing in such growth stocks? Because it's not just about whether the stock grows or doesn't grow anymore. It's all about how much is the change? How big is the change in the growth rate? If the growth rate accelerates, the stock price exponential increases, and vice versa, if the growth rate decelerates, the stock price falls down. What you'll be learning today is this, the Delta of the Delta, how to analyze growth stocks, what happens with growth versus expectations and what is the outcome. By the end of this video, you will perfectly understand what this means and you will be able to apply this tool to all your future growth stock analysis and better understand the risk and reward when it comes to investing, thus protect your portfolio. This is especially an important topic as the last decade was the decade of growth stocks. If we look at the NASDAQ Compositive Index, it went from 1,500 points to 8,654 points over the last 10 years. That's a 6X increase, that's a phenomenal performance, but did those businesses perform as well as their respective stock prices? Let's see Microsoft, which is one of the top five constituents of the NASDAQ Index. So Microsoft's price earnings ratio increased from 7.5, unbelievable but true, in 2011 to the current 30. Such an expansion in valuation means that investors' expectations considering growth have also been constantly growing in comparison to what they expected at the beginning of the decade. Similarly, Visa's price earnings ratio expanded from 15.5 in 2010 to the current 33.5. Such valuation expansions increases signal that investors became exuberant about the growth rates in the future and expect constantly higher, higher, higher and higher growth rates, higher and higher earnings that justify paying higher and higher stock prices with higher and higher valuations. Now when it comes to, that's the definition of growth stocks, higher and higher growth and higher and higher valuations, the key to investing those is to analyze, okay, what's the risk, what's the potential, what is the biggest factor that influences the stock price and thus your investment returns because the dividends are usually small. And that's the change in the growth rate and I'll show you how you can apply and how it influences the stock price. So the delta of the delta tool is the perfect tool to do that. But before discussing the tool, let me give you an overview of Visa so that you can even better understand the great business it is, the great growth it enjoyed and how to analyze it. Please consider subscribing. It means a lot to me. It supports the channel and please click that notification bell as I do a lot of various videos so that you don't miss out on those videos that are really important for your financial success, always long-term. Thank you, thank you, thank you. Visa is the ultimate compounder. Revenues keep growing, earnings and cash flows follow. This leads to constantly higher dividends while the market for Visa simply keeps increasing thanks to global economic growth. I have two bank accounts, one is Visa, the other is MasterCard. I think if you open your wallet, you'll probably find a Visa card so when you look at Visa, what they did in the past, it's simply amazing. Over the last decades, revenues more than tripled, net income quadrupled and the dividend was increased by a factor of 10. That's really, really crazy and as the dividend increased, the dividend yield even decreased and consequently the only outcome for a stock like that, a growth stock like that is to skyrocket. So Visa was $16 in 2008, now it is at 180 and Visa shareholders have been really, really rewarded. Now, except for the amazing past performance, there is also a risk. Visa comes at a high valuation and a low dividend yield of just 0.66%, below 1% dividend yield. So what's baked into the price is constant future growth. Fortunately for Visa stockholders, the company just keeps on giving and giving. They have a low dividend payout ratio of around 20% because they can reinvest capital at rates above 20%. So that's best for shareholders. The company has all what you can dream about when it comes to investing, growing revenues, high margin, high return on invested capital, alongside constantly growing distributions to shareholders. Apart from the dividend we already mentioned that increased 10 times, the number of Visa stocks outstanding fell from 2.2 billion over the last 10 years. That's almost 30% less than the number of stocks outstanding in 2009. Visa's growth comes from their strong mode that is also reflected within their extremely high net profit margin. If you look at their profit margins, net revenues are just 6 billion for the quarter and net income is 3 billion. That's net profit margin just shy of 50%. Not non-gap net income is above 50%. This means the company has a huge moat. And the outlook is also simple when it comes to Visa. For as long as the company can keep growing earnings at 15% per year, the stock will follow. The management expects the company to continue to grow at mid teens, 15%. And therefore, this is also baked in the stock price. However, when it comes to investing, it all depends not whether Visa will grow or not, whether Visa will stick to the 15% growth that the management and the market expects. Let me show you a few earnings models about what happens depending on that change in the growth rate, the delta of the delta. And then you'll understand better how to analyze growth stocks. If earnings continue to compound at 15% per year, the future price earnings ratio that is now 43 in five years will be on the current stock price just 16.82 because current earnings per share are 5.42 in five years earnings per share compounding at 15% per year will be 10.70 and the price earnings ratio will be of 16. If growth continues at 15% over the following five years, then earnings will reach 21.52 and the price earnings ratio will be just 8.46. That's extremely unlikely to see such a low price earnings ratio. Therefore, the stock will simply follow earnings growth at the valuation that the market decides is good for growth stocks. In this case, price earnings ratio of 43. And if Visa continues to grow at 15%, the return to shareholders will also be 15%. The questions are, will Visa continue to grow as fast for a long time? What happens in Visa's growth is in the low teens or in the high teens? How does that affect the stock price? The answer to these questions will be given by the Delta of the Delta tool on how to analyze growth stocks by looking at the change in their growth rate. For example, if Visa's growth that is expected to be at 15% going forward falls down to 10% per year. Everything changes from an investing perspective not from a business perspective from an investing perspective. So this is counter-intuitive because 10% of yearly growth is still amazing but it might not be what is baked into the stock price. If Visa's earnings grow at 10% over the next five years, earnings per share would grow from the current 5.32 to 8.71. And not to 10.70 as it would be the case with 15% growth. Then the market will likely re-rate the company from a price earnings ratio of 30, 43 for 15% growth to a price earnings ratio of 20 for 10% or slower growth or slower trending growth. Then when you multiply 8.71 times 20 the likely stock price is to be in five years is 174 that's equal to the current stock price. This is really counter-intuitive. You say, okay Visa continues to grow at 10% but the stock price doesn't go anywhere but the business is still growing. And here it comes to explains and this explains the biggest risk when it comes to growth stocks. The change in the growth rate, the delta of the delta tells you whether the investment will continue to deliver great returns or be a 0% investment in this case. If earnings growth goes lower goes to 5% then the price earnings ratio as we have seen them in 2009 might fall even lower 15, 10 and then you might see also a big decline in the stock price. That is why these growth stocks are often very, very, very volatile but this is how it is and this is the risk reward you have to think about when it comes to investing in growth stocks. The same works on the upside too however if Visa manages to grow at 20% per year earnings per share would go from five to 14 over the next five years and the market would probably value the stock with the price earnings ratio of 40. Therefore the stock could reach an incredible $568 over the next five years and then even higher over the next 10 years. This is the magic of growth stocks and this is the risk reward of investing in growth stocks. So the key when it comes to investing in growth stocks is the rate of the growth, the change in the growth, the delta of the delta and that's something you have to put into perspective before investing in the company. So for the risk reward analysis to conclude on growth stocks you have to ask your question what's the probability for Visa to grow at 20% at 15% at 10% and lower what's baked into the price and what's my investing risk reward ratio because when it comes to growth stocks it's not that much about business it's more about the valuation and the stock price. Amazon did grow amazingly over the last 20 years but it took 15 years or something like that for the peak at the dot-com bubble to be surpassed in this new growth stocks cycle. So the business growth took more than a decade to reach the stock price expectations and growth and that's something you have to think about compared to all other investing options out there. So to summarize the delta of the delta growth stock analysis you have to see okay does growth match expectations if the growth matches growth expectations the stock will likely grow at the same rate of growth. If the growth rate beats expectations if you can find the stock that is likely to grow but the market doesn't see it then you have a winner because what happens higher growth and expectations will lead to a higher price earnings ratio to higher valuation and higher stock price growth exponential. This is what can happen to Visa if the growth turns higher towards 20% Visa can be a $500 stock easily. Growth rate below expectations is what you want to avoid and this is usually what happens with exuberant stocks and this is what happened in the 2000 dot-com bubble. If the growth falls below expectations all the exuberant feelings quickly turn cold the market gives a much lower valuation and the stock consequently falls. This is why investing in growth stocks is considered risky and why investors expect a higher return. Visa investors have been rewarded with double digits returns over the past because they are taking the risk that the growth eventually or somewhere slows down or stops or goes even down if you have a recession. If this helped you when it comes to your investing please subscribe or enroll in my free stock market investing course where I put many and I will put many other investing lectures, videos about tools, mindset and everything that's really important when it comes to investing. If you want to see all my real investments if you want to save money by having me doing the investment research for you check my stock market research platform you have my portfolios you have everything that I do for less than a dollar a day. Thank you for watching looking forward to comments and I'll see you in the next video.