A rough look at relative valuations

With the recent pull back I thought I would take a look at some of our stocks. I plugged in some 
numbers that I think are reasonable to see returns over the next 3 
years.  The first column is my guess on the stocks average revenue growth over the next 3 years. 
 I have all the companies slowing down with lower price/sales ratios in 3 years (with the exception 
of HDP)  If HDP can can grow its revenue I think it will command a higher P/S ratio assuming they 
continue to do good things with their cash flow.  The 3rd column is annual return over those 3 
years.  I don’t think these projections are overly aggressive,  although they aren’t overly 
conservative either.  Nice to see solid returns even with slowing growth and lower p/s ratios. 

3 year revenue growth   P/S in 3 years     CAGR
AYX -  35%                  10.              17%

OKTA - 30%                 8                 17%

HDP - 35%                   7                 31%

SHOP 40%                  12                  22.3%

To do your own  calculations take the annual revenue for the company, multiply by the revenue growth
 you think is plausible. I.e.  Shop revenue 683 million multipled by 1.4, do that 3 times and you 
get 1874 million.  SHOP’s P/S is currently 17ish, have that drop to 12 because of the slowing growth
 rate. So you multiple 12*1874 and get 22488 million market cap (or 22.5 billion). Plug the current
 market cap of 12.3 billion and the future marketcap of 22.5 billion into any CAGR calculator over a
 period of 3 years and you get an annual return of 22.3 %.  This very simple model doesn’t take lots
 of things into account which is fine as long as you understand that things like dilution, FCF, 
earnings etc aren’t part of this. 


I do like the simplicity of this methodology compared to my EV/FCF spreadsheet with 3+ scenarios for each company…might have to add in a tab with similar simplified methodology into my spreadsheet (which now has NVDA and ANET included in addition to PSTG…but not yet put into Google docs).

With the market being closed tomorrow and Saul’s end-of-month post coming up this weekend, I’m thinking this board will have some rather nice analyses posted between now and Monday.



I finally got to read this…the board has been busy lately, huh? Anyway, I like it…kinda what I do in my head sometimes – as a double check to make sure valuations aren’t getting to crazy. But never to pick a stock based on valuation, of course.

As you said, it’s nice to see solid returns even given fairly conservative growth and a lower PS.