A different look at valuation - PSG

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 :slight_smile:

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,


Hi Niki,
Typically P/S or EV/S are used for companies that don’t have positive earnings yet, so the PSG is valuable in those cases to normalize those metrics with revenue growth. Many of the SaaS style businesses fall into this category because they have mostly reoccurring income that they have to recognize over the life of their contract while their expenses to acquire customers have to be recognized up front. The PSG isn’t a great comparison tool for companies like V, DIS, AAPL, GOOGL as they have earning and can be judged based on their earnings so the standard PEG should be applied to those companies. Obviously everything I say should be taken with the caveat that any one metric isn’t enough to judge a company.



I like it, Niki.
Makes me think back to my post about using EV/FCF or OCF as a metric.

Adding a column to the data you posted to include existing profit or cash flow generation margins would likely tell a lot of the story for Disney and Visa (as well as Google and NVDA, as they have nice actual profits and cash flows already).


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!

Nice analysis. I think it’s a metric that is best applied to smaller cap growth companies. I use the metric myself when picking stocks. It is difficult to project growth rates farther into the future so some flexibility is desirable. Some stocks are trading at a premium due to a very large projected TAM and others a discount due to a smaller TAM.

Some stocks have appreciated so swiftly recently that they just might need a little consolidation of those gains before appreciating further. For example, I own NTNX with a 120% gain in only 8 months. I’d like to buy more and it still looks attractive by these metrics but I was waiting for a pullback myself before adding. I will probably add soon.


1 Like

Excellent thought process.

I use a version of PSG.
Agree this applies more to smaller companies and specially those who are reinvesting substantially rather than generating free cash flow.

I also add gross margin % as part of the mix. Because for same growth rate and same P/S today, a company with higher gross margin has prospect of higher cash flow when they decide to slow / stop reinvesting.

This would change your lists’ order substantially.

Other factors to add are recurring revenue vs one time (infrastructure like) revenue and they need a different valuation treatment. It’s hard to put these into numbers so I just catagorize them and but default prioritize recurring revenue businesses.