Hi all,
in response to the recent selloff I was thinking about buying opportunities and valuation. As many of the stocks discussed here are often valued by P/S (or EV/S), I asked myself: Why are P/S-ratios never taken in relation to the companies growth? What if we take the idea of PEG and transfer it to P/S - resulting in a ratio called PSG?
The idea is certainly not new, but I was still surprised that even after some research I didn’t find it used in the financial media. Only this seeking alpha article from 2015 popped out that discussed the ratio in more length: https://seekingalpha.com/article/3254065-a-new-spin-on-the-p….
I deviated a bit from the calculus proposed in the seeking alpha article linked above. There, the author suggested to calculate PSG by dividing P/S by the five-year revenue growth rate. I didn’t want to emphasize so much on averages of the past, but rather look at future projections. So I decided to calculate my PSG by dividing forward P/S with the expected FY18 revenue growth rate.
I have a larger set of numbers in my sheet, but for simplicity reasons I will only include the forward P/S and PSG ratios. Also, I found it hard to make the table look nice in the post, so it’s just a short excerpt. The Revenue 2018 estimate numbers comes from the consensus analyst estimate from CNN money (I haven’t used their site before, but I stumbled upon it and thought their way of showing forecast numbers quite usable).
So to the list:
Ticker P/S Rev Growth. PSG
forw. forw.(exp.) forw.
AMZN 3,11 31,20 0,100
NTNX 7,07 43,43 0,163
TLND 7,05 35,40 0,199
AAPL 3,24 14,97 0,217
SHOP 13,60 48,21 0,282
ANET 8,92 31,25 0,286
SPLK 10,86 36,84 0,295
HUBS 8,56 28,94 0,296
AYX 11,79 35,79 0,329
GOOGL 6,54 19,73 0,332
NVDA 14,07 40,58 0,347
DIS 2,56 5,99 0,427
SQ 15,57 32,11 0,485
V 13,12 9,78 1,341
NKTR 47,93 14,04 3,414
As you can see, I ranked the stocks already by PSG (the lower the better/cheaper). I also included some Non-Saul stocks to put the numbers in perspective.
The ratio between P/S and revenue growth is quite different than the ratio between P/E and earnings growth. With PEG we typically say: PEG = 1-1.5 = fairly valued, PEG < 1 = undervalued, PEG > 1.5 = overvalued.
With PSG I can’t say for sure what corridors should be applied for saying anything is under/over/fairly valued. The seeking alpha article suggests, that a ratio below 0.2 can be considered cheap and will beat the market, while ratios above should be seen as overvalued and typically underperform. Looking at my list, taking the value of 0.2 as a starting point for “fairly valued” seems reasonable to me.
NKTR seems to be quite outside the norm, but I think everyone who invests in this name, knows the highly speculative nature of this investment - and that it shouldn’t be valued by financial metrics at the moment.
Also it seems a bit counterintuitive that names like DIS and V (who would typically be regarded much more “fairly valued” than some of our stocks) rank very low on the list. That certainly points to a weakness of the metric: Companies with no or very low revenue growth perform very poorly here and appear “overvalued” according to the PSG ratio - that is probably the wrong way to look at it. But it shouldn’t be a concern for us, as we don’t look to value these kind of stocks here anyway 
My biggest takeaway here is that our stocks are potentially not so overvalued after all - especially in times were everyone is calling out to run out of stocks with “crazy valuations”.
Other than that I think TLND and NTNX look pretty attractive from that list. We just read from Bert Hochfeld that TLND looks like a bargain compared to the MULE acquisition. NTNX had an amazing run in the last months but pulled back a bit the last days. I picked up some shares at 47.32. In all fairness though, this buy decision was not so much influenced by this list.
What do you think of the PSG ratio? Should it be used more often for relative valuation? I’m myself not so sure yet what to do with it. Would love to hear what you have to say!
Best wishes,
Niki