A weird metric called Price to Earnings

[PaulWBryant]

Over the past years, all these companies (except maybe ENPH, I don’t know) have had negative earnings, or a PE too high to make any sense – higher than SNOW has now. But look what we are starting to see. These companies now have positive earnings (and PE ratios), and some are making giant leaps forward here. Here’s the last several quarters of non-GAAP earnings per share for these companies:

BILL and Zscaler (and Crowdstrike to some extent) really stand out. That’s one reason I’ve made them my top holdings. If the trend of the last 2 quarters continues for BILL, it will have likely $2+ in 12-month EPS. That would give it a PE ratio under 50. Maybe the market isn’t giving it full credit since it is benefiting from float revenue, but personally I don’t think interest rates are going back to 0 any time soon. Meanwhile the business is improving rapidly and the EPS will be a percentage of a higher revenue number. I could easily see them hitting $3 or $4 or more of EPS in the next year or two. I see BILL as still very undervalued, even after shares were up 22% last week.

Zscaler has obviously come a long way in just 3 quarters, and I expect it to continue. If they get to $2 EPS in the next year or so, that would be a PE under 45 at the current stock price. Then I definitely can see $3 and more in a couple years.

Note: PE ratios of 45 or 50 are not classically “low,” but for a steady 20%+ grower they’re quite reasonable. The key word is steady. I don’t see Enphase as the best bargain above just because they have the lowest PE ratio. I balance that with the fact that they don’t have a subscription model, so it’s not reasonable to project higher revenue each year for many years to come.

And in general, as I said here (An honest question, using DDOG as example - #17 by PaulWBryant):

@PaulWBryant

My point in this thread…is that growth trends can be misleading. When something like ENPH is throwing up epic ~20% sequential growth like it did in Q2 and Q3 last year…we need to realize that probably won’t continue. When DDOG and SNOW are suffering because companies are optimizing cloud spending in any way they can…we need to realize that probably won’t continue.

…so don’t think that DDOG’s sort of boring steady EPS won’t make another jump up at some point, or that BILL’s will go to $1/quarter within the next couple quarters, or that Zscaler’s will continue to double every few quarters, or whatever. The trends will change over time. But IMO that reinforces the importance of recurring revenue. It smooths out growth trends in a powerful way, over the long term.

This is obviously not a sophisticated analysis, but just something I thought I’d mention.

Bear

[rmtzp]

@PaulWBryant how do you think about balancing your growth-investing mindset with your value-seeking one? I understand investing is not a game of “either” vs. “or”, but let me add some context…

The heuristic that many of us here have employed is seeking companies that are growing “up and to the right” across financial and operational metrics. But when things change and great companies aren’t in that mode - how do YOU identify the opportunities worth chasing?

Do you monitor the progression of EPS to identify candidates (as you imply in your post)? Or do you have other methods you use to evaluate what you consider to be “undervalued?”

Would love anyone to weigh-in - it’s normal that many of us are evolving our style, and I’m eager to hear different perspectives on this topic.

-RMTZP

[PaulWBryant]

@rmtzp

how do you think about balancing your growth-investing mindset with your value-seeking one?

I look for both, but the problem with “value” is that without growth it’s temporary. If something isn’t growing, you can only squeeze so much more EPS out of it. So I don’t really look for value. I just notice it in companies that already interest me – usually because of their growth.

@rmtzp

The heuristic that many of us here have employed is seeking companies that are growing “up and to the right” across financial and operational metrics. But when things change and great companies aren’t in that mode - how do YOU identify the opportunities worth chasing?

I’m not really interested in owning companies that aren’t “up and to the right” (which I assume means they’re growing over time). I’ll just hold cash or buy bonds if there are no such companies. But I don’t think it will come to that, really.

@rmtzp

Do you monitor the progression of EPS to identify candidates (as you imply in your post)? Or do you have other methods you use to evaluate what you consider to be “undervalued?”

Sorry if I implied that. As I said above, value is secondary. I have to be interested in the company for other reasons before I even consider value.

Hope that helps!
Bear