I appreciate Endoscopist’s link here: https://discussion.fool.com/i-am-down-quite-a-bit-in-my-portfoli…. The article was dated Dec 13, 2021, and it showed 5 SaaS pullbacks in the last several years, including the one in early 2021 and the one in late 2021. That late 2021 pullback is either still ongoing and has become the most significant pullback yet, or we have had another pullback (or several) in early 2022. However you look at it, the result is the same: valuations are compressed.
Well thanks, Captain Obvious. But I wanted to get some perspective on how compressed. Are valuations really low? Of course they can always get lower, but how do they compare to how they looked before everything got so crazy expensive in the run-up to Oct/Nov 2021?
No valuation metric is perfect, but we’re all familiar with Price to Sales or Enterprise Value to Sales (EV/S). Taking the concept further, Enterprise Value to Next Twelve Months Sales (EV/NTM) looks a year ahead which takes into account growth rate, but of course the obvious caveat is that we don’t know what growth will be in the next year. So Jamin Ball (https://twitter.com/jaminball) uses guidance (I think), which obviously makes his EV/NTM metric conservative, as companies plan to beat guidance quite substantially.
Still, as a very rough indicator, I think it’s useful. So, using Jamin’s data, I tweeted about it back in January, and I updated the info just now: https://twitter.com/investing_bear/status/151780906394131251…
My take away from the exercise is that we really are at a level where opportunity abounds. For evidence, just look at my top 3 holdings. Datadog and Bill.com and Zscaler are growing faster than ever. And yet their valuations are even lower than the reasonable levels of early 2021 – before the run up. I don’t expect a return to the insane levels of mid to late 2021, but for valuations to go much lower I think the companies’ growth would have to grind to a halt. I know there are fears of interest rates and even recession, but none of that is anything that hasn’t happened before. Covid was something that hadn’t happened before, at least in our lifetimes, and these companies grew through that. I think we should expect the world to go on spinning, and the cloud to keep on growing.
A simple, but for me, a calming thought.