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