Yesterday, draj asked if I have the current Oomph factors of the companies that are commonly held by many here. As a matter of fact, I do, and am presenting the results and valuations in this post. Some interesting conclusions are that I find Shopify to be reasonably valued all of a sudden, but Fastly’s valuation seems stretched. I also analyze how EVSO multiples have expanded from a year ago.
You can skip the next section if you already know what Oomph and EVSO are.
What is the Oomph factor?
The Oomph factor is a metric I devised last year to measure the financial performance of hypergrowth companies. I first presented it in this post: https://discussion.fool.com/the-oomph-factor-34182263.aspx To calculate the Oomph factor, take the square of the Quarter-over-Quarter (QoQ) revenue growth rate, written as a multiplier. Then multiply that by the company’s Gross Profit Margin (GPM). Note that QoQ means the latest quarter compared to the same quarter a year ago.
Oomph = GPM*(1 + %Sales Growth QoQ)^2
For example, if a company is growing revenues 50% QoQ, the multiplier is 1.5, and 1.5 squared is 2.25. If this company has a GPM of 60%, then the Oomph factor is 2.25*0.6 = 1.35. When I first posted about this, I noted that companies with an Oomph factor above 2.0 are doing exceptionally well. There are relatively few of them, and they’re hitting it out of the park.
The EVSO ratio is a valuation metric that measures the multiple of Oomph that investors are currently willing to pay for a company. It’s calculated by taking the EV/S ratio and dividing that by the Oomph factor. Just like P/E ratios, the lower the EVSO ratio, the better, from a valuation standpoint.
Current Oomph and EVSO Valuations
Here are the current valuations of the companies I hold, plus a few more, based on the above metrics. It’s sorted by ascending EVSO.
**Gross Revenue** **Ticker Margin Growth EV/S Oomph EVSO** ZM 61.0% 169.0% 56.3 4.41 12.7 <--- most undervalued CRWD 78.0% 85.0% 34.3 2.67 12.9 LVGO 74.4% 115.0% 45.2 3.44 13.2 MDB 71.0% 46.0% 22.3 1.51 14.8 AYX 88.0% 43.0% 26.6 1.80 14.8 DDOG 77.4% 87.0% 53.6 2.71 19.8 NET 78.3% 48.0% 34.7 1.72 20.2 TWLO 52.9% 57.0% 26.6 1.30 20.4 SHOP 52.5% 97.0% 43.5 2.04 21.3 OKTA 77.2% 46.0% 37.6 1.65 22.9 TTD 78.1% 33.0% 32.3 1.38 23.4 ZS 77.7% 40.0% 38.3 1.52 25.2 COUP 72.3% 49.0% 43.1 1.61 26.9 FSLY 57.6% 38.0% 39.5 1.10 36.0 <-- most overvalued
Based on the above, Zoom is the most undervalued of the lot, even with an EV/S ratio of 56! That’s because it has an Oomph factor above 4.0, which is an extraordinarily high level. Other exceptional companies with an Oomph factor above 2.0 are CRWD, DDOG, LVGO and SHOP.
The EVSO valuation ratios are clustered in 3 different ranges. There’s the lower-valuation 13 to 15 range where ZM, CRWD, LVGO, MDB and AYX reside. Then there’s a jump to a mid-level valuation range of 20 to 23 where TWLO, NET, SHOP, OKTA and TTD reside. And, finally, there’s a highly valued range above 25, with ZS, COUP and FSLY.
Fastly, with an EVSO of 36, seems like an outlier. I know they raised guidance for the quarter and year, but even then, I don’t know why the market is valuing them this high.
Based on their latest blowout earnings call, Shopify’s EVSO ratio has come back down to earth, at a “reasonable” value of 21. If it gets back to its historical valuations, I wouldn’t be surprised if the stock moves significantly higher from here.
Speaking of historical valuations, how much have EVSO multiples expanded compared to a year ago?
Comparing EVSO Ratios to Last Year
The following table compares today’s EVSO ratios to last year (specifically, to April 2019).
Cur. 2019 Ticker EVSO EVSO %Change AYX 14.8 9.4 57% ZS 25.2 15.1 67% MDB 14.8 13.4 10% TTD. 23.4 9.7 141% TWLO. 20.4 14.1 45% OKTA 22.9. 15.9 44%
MDB is remarkable in that its valuation multiple has stayed pretty much the same, despite the stock going up 62% since April last year. All the others have experienced EVSO multiple expansions of 44% or higher.
Based on the above analysis, I’m inclined to put new money into Zoom, CRWD, MDB, and SHOP, and avoid putting new money into FSLY for now. Please note that EVSO is just one way of evaluating a company, and there’s nothing magical about it, nor is there enough data about its predictive value. Saul came up with an improvement to the Oomph factor in message #55380 which you should read. You should also read Saul’s knowledge board about other factors in evaluating companies, like founder-led, Total Addressable Market, Net Dollar Expansion Rates, etc.
I hope this post has been useful.