Terminal Value Fade Period
A fade period sits between the explicit high-growth forecast and the steady-state perpetuity. Growth rates decay smoothly (often linearly) from the high-growth exit rate to the long-run stable rate. The result is the three-stage DCF.
The two-stage model overstates value for fast-decelerating businesses
Two-stage assumes a step from high growth to stable growth at year n. Real businesses do not step. A fade period acknowledges the gradual reality. The H-model is a closed-form linear-fade approximation; an explicit three-stage build lets you model non-linear fade or stage-specific margin and capex evolution.
Three decisions the analyst must make
Five to ten years is common. Longer fade smooths more; shorter fade resembles two-stage. The choice is a judgement about how long competitive advantage persists.
Linear is the default. Concave (fast early, slow later) fits regulated-margin convergence. Convex (slow early, fast later) fits product-cycle exhaustion.
Revenue growth always. ROIC and margins often. Capex intensity sometimes. The discipline is to fade consistently: do not let growth fade while margins stay elevated forever.