I seldom post here, because I don’t have anything worthwhile to say. I think I may just have something.
We are all familiar with the peg ratio. (P/E)/five year expected growth rate.
It just won’t work for SAAS stocks, because there are often negative earnings, or tiny ones.
But I thought of an alteration to it.
(P/S)/revenue growth. Now, what revenue growth. YOY, 5 year expected, or next years. Since revenue growth is very volatile, I don’t think the past is good to use. 5 years is really impossible to predict. My vote is (P/S)/next years expected revenue growth.
It may not be a good way to compare SAAS stocks to non SAAS stocks, but I think it would be a good way to compare SAAS stocks to other SAAS stocks.
It just won’t work for SAAS stocks, because there are often negative earnings, or tiny ones. But I thought of an alteration to it.
(P/S)/revenue growth.
I can’t think of any reason why this would be more useful than determining a 12 month forward P/S or the trailing P/S for that matter. The reason why I think doing so is important is because we have useful data on prior acquisitions based on this valuation. For instance, Mulesoft was bought for something like 16x forward sales when Salesforce made the deal. We have real world examples in which to compare companies we own.
Plus we can make intuitive comparisons against companies we own/analyze. P/S has many factors associated within it and can’t be taken within the microcosm of comparing it to revenue growth. Gross margins, leverage in the model, addressable market, competitive advantage, impact of a recession, and recurring revenue are a few of the big ones I consider outside of revenue growth when thinking about valuations. I’m sure there are others.
What would this really tell us that simply looking at P/S or EV/S would not?
I can’t think of any reason why this would be more useful than determining a 12 month forward P/S or the trailing P/S for that matter. The reason why I think doing so is important is because we have useful data on prior acquisitions based on this valuation. For instance, Mulesoft was bought for something like 16x forward sales when Salesforce made the deal. We have real world examples in which to compare companies we own.
Plus we can make intuitive comparisons against companies we own/analyze. P/S has many factors associated within it and can’t be taken within the microcosm of comparing it to revenue growth. Gross margins, leverage in the model, addressable market, competitive advantage, impact of a recession, and recurring revenue are a few of the big ones I consider outside of revenue growth when thinking about valuations. I’m sure there are others.
What would this really tell us that simply looking at P/S or EV/S would not?
First, as you mentioned, there are many things to look at. Probably sustainable competitive advantage is the most important of them. What I think it tells you is if the p/s is justified. If you have high revenue growth a company deserves a higher p/s than if you have low revenue growth. To make it simple, lets call it the psg ratio. If it is analogous to the peg ratio, then the lower the psg ratio, the better deal you are getting.
Let us not forget about gross margins, however. A very high gross margin paired with high growth is the reason these stocks warrant a high P/S multiple.
I think it’s time to let this very Off-Topic thread ride off into the sunset and disappear. THIS BOARD JUST ISN’T ABOUT COMPARING COMPANIES ON SCREENS. It’s about evaluating and discussing INDIVIDUAL high-growth companies.