# EV/S/O

I’m reposting this due having been originally posted the day of Saul’s Monthy Portfolio review. So maybe you saw it before maybe not ( numbers not updated so check current EV/S at current share prices for more recent values).

EV/S/O: It was considered by many here, 14 months ago, an interesting way to look at how to value the companies discussed on this board.

I love almost everything about Snowflake and the valuation will be easily taken care of by their massive TAM, https://hhhypergrowth.com/a-snowflake-deep-dive/.

I’ve read that the costs incurred by by Snowflake from the centralized cloud (AWS, Azure, and GPC) are a concern. Do you believe that these costs are what is primarily responsible for their margins being 60%, only low when comparing against the favorites here on Saul’s Board I know. But since we’re discussing this here I’ll ask?

14 months ago Saul posted his appreciation for the relative values in the equation EV/S/Oomph, https://discussion.fool.com/MessagePrint.aspx?mid=34201747. Multiplying 20% to Rev Growth x Margins (due to recurring revenue)

I haven’t read much lately about the importance of Gross Profit Margins relative to revenue growth; but, when it was discussed here at great length 14 months ago, I came to see some relationships that have served me well.

The equation EV/S/Oomph When Oomph = GPM*(1 + %Sales Growth QoQ)^2
is better explained in the above links.

Simply said the EV/S that we all know is divided by the square of sales growth times Gross Margins. Meaning that Revenue Growth, being squared and in the denominator with GM, is by far the most important factor in valuing a company here. Next would be margins. Take those and multiply them together and take the product and multiply that time 20% for what Saul believed was adequate for the consideration of recurring revenue.

I believe Snowflake would make a good example for how to apply these metrics not for basic valuation as in EV/S but EV/S/O and perhaps using Saul’s bump due to the revenue being recurring. Make sense? Well not to confuse things too much, I’d like to use Revenue Growth YoY instead of QoQ as was agreed to by Saul and others. I do this mostly because it’s easier to get and as long we’re comparing apples to apples I don’t see the problem. Please tell me If you feel differently.

Snowflake, per Seeking Alpha stats
EV =\$77.55B They have some cash added to Market cap
Sales= 402.66M
EV/S=192.59

Revenue Growth y/y, per Seeking Alpha= 173%
Gross Profit Margin= 61.01%

Oomph = GPM*(1 + %Sales Growth QoQ)^2 1.2
.61
(1+ 1.73)^2*1.2=5.45

EV/S/O= 192.59/5.45
EV/S/O=35.22

Let’s compare that to Zm

EV/S per Seekimg Alpha=107

RevGr=355%
GM=73%

GM*(1+%Sales Gr QoQ)^2
.73*(1+3.55)^21.2=.7320.7*1.2= 18.13

EV/S/O= 107/18.13= 5.9

And CRWD

EV/S=42.57
Rev Gr=86%
GM=72%

.72(1+.86)^2*1.2= 2.98

EV/S/O= 42.57/2.98=14.25

DDOG

EV/S=59.48
Rev Gr=.80
GM=.78

.78(1+.8)^2*1.2= 3.03

EV/S/O=59.48/3.03=19.63

EV/S/O
SNOW. 35.22

Zoom. 5.9

CRWD. 14.25

DDOG. 19.63

Like I said at the beginning of this post, I’m reposting this due having been originally posted the day of Saul’s Monthy Portfolio review. So check current EV/S at current share prices for more recent values.

I do find these values useful to check against my confidence levels and % in portfolio for consistency.

If you’ve read this far, are you using or will you use EV/S/O?

Current allocations.
Zm 21%
CRWD 20%
NET 18%
DOCU 17
DDOG 16%
WORK 8%

Jason

34 Likes

I really like the thought process behind this metric. EV takes into account cash and debt and then including the gross profit margin and growth rate makes perfect sense. My only comment is that I wouldn’t square the growth rate. Since this is a snapshot in time with the revenue and gross profit numbers, I think it is more fair to assume the growth rate holds for one year instead of two (which is essentially what the exponent does). With all else equal, a company holding steady at 60% growth rate would look much worse than a company at 80% who is on their way to 60%. Just my personal opinion and yes I am/will be using this.

-Marcus

4 Likes

I brought up what IMO was an interesting arguement surrounding valuation that took place 14 months ago on this board because I do see value in going back and reading prior posts, including this one.

Full disclosure at the end of the thread connected to the link given above Saul concludes that EV/S/O is not really useful for him.

Saul-
Tex Mex, You are right, you can fiddle with this all day to try to get it to take everything into account.

‘what about the seasonality? typically Q1 are weaker quarters and Q4 stronger.’ – tj

tj – you are right too. There are just too many factors

In Conclusion: As I said, you can fiddle with this all day to try to get it to take everything into account. It’s ridiculous to think that I can predict what’s going to happen based on trying to adjust the EV/S. Almost as ridiculous to think I could predict what’s going to happen based on bare EV/S by itself. I am going to quit wasting my time with it. It’s a nice exercise, and it makes it clear that bare EV/S is inadequate, but no single number is going to give me or you a true picture of what is going on in a company and the company’s value. I’m going to get back to just trying to understand the company.