Here’s how I calculate the Oomph Factor

Investment Analysis Clubs Saul’s Investing Discussions
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Here’s how I calculate the Oomph Factor: I have it in table form on a spread sheet, but I’ll describe it in words here so you can follow what I do.

I decided a 10% bump for recurring revenue was inadequate. The recurring revenue is what our SaaS companies are all about after all, so I decided, for myself anyway, to use a 20% bump for 100% recurring revenue.

First I collect the basic statistics:

Enterprise Value is straight forward, as of the day I’m calculating it.

For Revenue I use the last reported quarter and multiply by four. That way I’m not using the past (trailing 12 months) and I’m not guessing the future. I’m using the here and now. We take growth into account later.

For Growth Rate and Gross Margin and Percent of Recurring Revenue, I also figure as of the last quarter. No “2018 growth rate” or “next twelve months growth rate,” etc.

Those five are all I need. Now a couple of examples. These are as of last weekend when I calculated them:

Let’s start with Zscaler, our poster-child for an overpriced SaaS company.

EV of $7.8 billion divided by revenue of $296 million gives us a bare EV/S of 26.4.

Now we get the numbers to put into our Oomph. The growth rate was 65% so growth rate squared (1.65 x 1.65) equals 2.72. Gross margin was 80% and Recurring revenue was 100% so we multiply that 2.72 times 0.8 times 1.2 to get my Oomph factor of 2.61. Almost finished. We divide the EV/S by the Oomph factor and we get an EVSO of 10.1. That looks a heck of a lot better than 26.4, doesn’t it?

Now Trade Desk, a different kind of company. EV of 9.7 and revenue of 642 gives an EV/S of 15.1. Then growth of 56%, gives growth squared of 2.43. Growth margin of 78%, and I gave them recurring revenue of zero (sorry, that’s what it is). So 2.43 times 0.78 x 1.0 = an Oomph of 1.90. And EV/S divided by Oomph gives an EVSO of 7.95.

Next, a non-tech stock, Invitea. EV of 1.85 divided by sales of 180 gives an EV/S of 10.3. They grew revenue at 61% last quarter for a growth rate squared of 2.59. A gross margin of 53 and a recurring revenue of zero like Trade Desk’s gives them an Oomph of 1.37, and then an EVSO of 7.52.

Let’s do Alteryx quickly: EV 5.25, Rev 304, EV/S 17.3, Growth 51%, Growth Squared of 2.28, margin of 89% recurring revenue of 96% (mult by 1.192 because 20 x .96 = 19.2) = Oomph factor of 2.42 and an EVSO of 7.15.

For Twilio, I could find Growth rate of 81%, gross margin of 58%, but I couldn’t find recurring revenue anywhere. I had to make a guess, and after some thought I guessed 70% recurring, and I got an Oomph of 2.17. and got an EVSO of 7.47. (But don’t think that the guess was the determining factor. Even if I had guessed just 30% recurring revenue, the EVSO would have been a respectable 8.02).

For a bigger number Okta, with an EV/S of 24.7, a growth rate of 50%, a GM of 76%, and recurring rev of 93%, had an Oomph of 2.03, and an EVSO of 12.17. I think it’s so high because of all the things that they announced at their conference and that muji told us about in his excellent deep dive last month.

Finally, for an eye-opener, we have Zoom, with an EV/S of 47.5, but a growth rate of 108%, and growth squared of 4.33. Gross margin of 86% and 100% recurring, and we get an Oomph of 4.47 and an EVSO of 10.63. High, but less than Okta’s and not much above Zscaler’s. (It was that 108% growth rate that made the difference, and pulled it back down. This shows that if you give Zoom credit for that very high growth rate, high gross margins, and high recurring revenue, it brings it down into reasonable range. Then we have to decide if it merits that.

Hope that this was useful.

Saul

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What Kind of Drawdowns Should We Expect From Saul's Investing Style?
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Saul,
Nvta hit hard after ER…i believe their growth y/y has declined 5 straight Qs…perhaps a factor.

What about something added to the rquation that accounts for the stability of the growth rate? AYX has managed 50% y/y for a while. ZEN increased slightly the past years. When others declined, like SHOP, you divested.

So if there is enought historical data, maybe we can add in the rate of change in growth rate to the mix.

If zoom went from 100% growth to 75% and then to 50% (still great) we could intuitively see that trend and grasp “slowdown”.

Just another variable to consider, i guess.

I like that TTD had a good score though! :slight_smile:

Dreamer

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Saul,
While I like the idea of trying to value growth companies I do have some doubts over the Oomph factor. Let me explain.

We are taking EV/S and dividing that by (1+growth factor)^2. One way to look at this is that we are calculating the EV/S 2 years from now after assuming that the revenue growth stays the same for the 2 years. So far so good. Then we compare all companies and consider the ones with lower EVSO as more desirable. By making direct comparisons we are assuming that the EV/S will be the same for all our companies after 2 years. Therein lies the problem IMHO. If on Year 3, company A is expected to grow at 30% vs company B at 50% then Company B’s EV/S is likely to be a lot higher other factors like GM being the same. So, it makes more sense that Company B’s EVSO is higher now. This is what I believe we are seeing with ZS. Market believes it can maintain its growth for a long time and so you see a higher EVSO.

For example, I tried calculating EVSO for Arista, and Docu and got numbers that were lower than AYX. For Arista despite the GM being at 65% its net margin is 30%, much better than many software companies, so I assumed a GM of 90% for apples to apples comparison.

So, the term that is missing in EVSO is the ratio of market cap to TAM and CAP. Companies with a low mcap to TAM and high CAP is likely to have a much longer period of growth and therefore appropriate to have a higher EVSO. ZS comes to mind again. Maybe even SHOP…

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“For Revenue I use the last reported quarter and multiply by four. That way I’m not using the past (trailing 12 months) and I’m not guessing the future. I’m using the here and now. We take growth into account later.”

what about the seasonality? typically Q1 are weaker quarters and Q4 stronger.

are you using the latest (corresponding to the revenue you use) quarter growth or the past or the next year growth?

tj

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Saul (or anyone really) -

In trying to calculate the EV for ZS, I have the following:

Price = $67.40 (Friday)
Shares = 134,246,000 (last Q release)
Cash = $339.9M
Debt = 0

Using the formula EV = price * shares + debt - cash, I get an EV for ZS of $8.58B. However, that number doesn’t match Saul’s $7.8B.

For TTD:

Price = $231.96 (Friday)
Shares = 46,777,000
Cash = $207,232,000
Debt = 0

I get an EV of $10.6B, again different from Saul’s $9.7B.

Can anyone tell me what I am doing wrong? I can’t seem to figure it out.

Thanks.

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Nvta hit hard after ER…i believe their growth y/y has declined 5 straight Qs…perhaps a factor. What about something added to the rquation that accounts for the stability of the growth rate? - Dreamer

Dreamer, You are right. The Oomph doesn’t tell you what is going to happen with the company’s business.

We are taking EV/S and dividing that by (1+growth factor)^2. One way to look at this is that we are calculating the EV/S 2 years from now after assuming that the revenue growth stays the same for the 2 years. So far so good. Then we compare all companies and consider the ones with lower EVSO as more desirable. By making direct comparisons we are assuming that the EV/S will be the same for all our companies after 2 years. Therein lies the problem IMHO. If on Year 3, company A is expected to grow at 30% vs company B at 50% then Company B’s EV/S is likely to be a lot higher other factors like GM being the same. So, it makes more sense that Company B’s EVSO is higher now. This is what I believe we are seeing with ZS. Market believes it can maintain its growth for a long time and so you see a higher EVSO….

So, the term that is missing in EVSO is the ratio of market cap to TAM and CAP. Companies with a low mcap to TAM and high CAP is likely to have a much longer period of growth and therefore appropriate to have a higher EVSO. ZS comes to mind again. … - Tex Mex

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

Can anyone tell me what I am doing wrong?

Stock novice, probably nothing. Probably you just got better share counts than I did in trying to do it quickly.

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.

Thanks for your help,

Saul

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“I’m going to get back to just trying to understand the company.” (Saul)

Could not agree more, Saul.

At the end of the day, common sense will always triumph over the ever changing numbers game.

Jim

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So, the term that is missing in EVSO is the ratio of market cap to TAM and CAP. Companies with a low mcap to TAM and high CAP is likely to have a much longer period of growth and therefore appropriate to have a higher EVSO. ZS comes to mind again. Maybe even SHOP…

This is by far the largest missing piece in my puzzle. So far as I can tell, TAM estimation is done on a pretty ad hoc basis. I’d love to hear from anyone tracking it rigorously. I get the impression TAM is most often used as an argument against a company with limited (perceived) future potential. A company with strong optionality will frequently shift TAM significantly, and assumptions from the past don’t play out as expected.

If you’re trying to gauge what’s cheap or expensive, I think the core question you are trying to answer is “How high are the expectations baked into this price versus a reasonable expectation of future growth and eventual profit?”* At 33x Revenue, a stock is pretty cheap, assuming it will dominate it’s business for years to come.

I like something like Oomph to model the first half of the question. Hopefully we can continue to illuminate the second half.

-Dopple

*Question 1b of course being “Will this story be more compelling in the future, persuading someone to fall more in love with it than I?”

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So far as I can tell, TAM estimation is done on a pretty ad hoc basis.

One of the reasons for this with many of the companies we discuss here is that they are not selling to an existing market, but creating a new market with a new product. Of necessity, that means guessing what the ultimate market might be.

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I can’t seem to determine where to find recurring revenue either amount or percentage. Sounds stupid but can someone help so i can learn to do this stuff on my own?

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I can’t seem to determine where to find recurring revenue either amount or percentage. Sounds stupid but can someone help so i can learn to do this stuff on my own?

JoRoSki -

I can’t speak for everyone, but there are a couple ways I approach it. First, many companies (OKTA, SMAR) actually break out subscription revenues in their earnings releases. I use subscription/total to figure the percentage that’s recurring. Second, I might need to dig in the 10Q or 10K to figure out the business model. There are usually some comments in there that describe their revenue streams. That might take a little more nuance to estimate how much is recurring if they don’t give an exact break down, but it can at least get you in the neighborhood.

Hope that helps.

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stocknovice: I am using these numbers:

shares: 124,147,097 (as reported in Interactive Brokers platform today at 1PM CST)
close on 5/7: $66.37 (using googlefinance function =GOOGLEFINANCE(“zs”,“close”,“05/07/2019”,1))
cap (B): $8,238.394 = 124,147,097 * $66.37
cash (last reported quarter): $339.9M
EV (B): $7,898.494 (cap - cash + debt (0))

I consider that close enough. Maybe Saul did some small rounding or the number of shares was different couple days back.

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shares: 124,147,097 (as reported in Interactive Brokers platform today at 1PM CST)
close on 5/7: $66.37 (using googlefinance function =GOOGLEFINANCE(“zs”,“close”,“05/07/2019”,1))
cap (B): $8,238.394 = 124,147,097 * $66.37
cash (last reported quarter): $339.9M

Thanks Tom.

I see our difference lies in the share count. I used the fully diluted figure from the last earnings release (134,256,000). 10M shares is clearly a huge difference. That probably makes this more of a source conversation than how to do the math. Or maybe a conversation about which share count to use when different ones exist.

In the end this seems to jive with my general takeaways from most valuation threads:

  1. Be consistent in which source you use.

  2. Any type of EV calculation seems to be more useful for establishing ranges for a particular stock or comparing two very similar stocks rather than bluntly comparing one stock to another.

This board helps me with assessing companies every day. That being said, these valuation discussions always seem to have a bit more voodoo in them (at least to me). I think it’s mostly because it’s more subjective than just sticking to the company’s performance numbers. That doesn’t make attempts at any of these metrics bad. It just makes them something I’m not quite ready to have in my tool belt yet.

As of now I’ll occasionally check the EV/S ranges for some of my stocks here: https://stockrow.com/interactive_chart/a9e50e61-7214-4f60-9d…. I do this as more as a relative value assessment rather than basing many real-money decisions off it. Looks like I’ll be sticking with that for now.

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Saul,
You’ve asked that I refrain from reporting on the one marijuana stock I hold (yet it’s up over 250% since I first purchased it in December, 2017). So I won’t delve into a discussion of this particular company.

What I do wish to open for discussion is the notion of “recurring revenue” which we’ve taken to be the same as subscription revenue. We seem to assume that a subscription is a guarantee of future revenue which is really only true for the prepaid portion of the subscription. However, if we contemplate future, long-term revenues the risk of subscription cancellation needs to be front and center. What we place under the general category of “stickiness” becomes the determining factor related to future recurring revenue, not the subscription model per se.

What makes a product or service sticky? There are a number of variables we can examine. How important is the offering to the conduct of business or desires of the consumer? What are the costs of transition to a different offering? How important is the network effect in its many manifestations? Has the brand gained substantial customer loyalty? There are numerous other characteristics that contribute to stickiness, but one we never examine with software is consumption. Software doesn’t get used up (for that matter, neither does h/w like Nvidea chips). Once you’ve got a piece of software, whether it’s by subscription or perpetual license, so long as it remains compatible with the technical environment (operating system, other applications, networks, etc) it is available for use without degradation indefinitely. It can become outdated though.

Consumables OTOH also provide recurring revenue. Not in the same way as a subscription does, but not too dissimilar either. Consumables run the risk of becoming commoditized, but for that matter so does software. And software has the annoying open source model (well, annoying for investors anyway). To some extent, companies that produce a consumable product can protect their market with intellectual property rights (Beyond Meat) but branding is probably the most common protection (Coca Cola, Marlboro, McDonald’s).

If the consumer (be it B2B or B2C) holds the product/service in high demand and the customer has established brand loyalty is their really a substantive difference in the recurring revenue? And isn’t the introduction of additional consumable offerings under the same brand akin to expansion rate?

I’m not sure, maybe this off topic, but it seems to me that we don’t just talk about specific companies on this board, we also address analytical techniques and the general factors involved with making investment decisions.

Wondering what you and others think about this way of looking at product offerings.

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The article about the venture capitalist and his take on the enterprise value to sales was illuminating. He pretty much agrees with us. Depending on your assumptions he sees companies like Zscaler or Mongo valued at either 1 year out of perfect execution or 3 years out of perfect execution.

He defines “perfect” execution as executing pursuant to internal corporate plans. That is how I seen it as well. I see Zscaler as 18 months forward. I see other companies at different levels forward. In the scheme of long-term hyper growth companies only being 1 year out is hardly a huge risk premium. During the bubble valuations were perfect execution (and beyond, with no diminishing growth rates) for 10 years or more. Basically 100% of the entire opportunity.

It was not discussed in the venture capital article, but was here and on NPI (soon to be a new invite only board as there has been very high demand - I am humbled) the key issue in valuation is not a multiple but what something is actually worth.

Like Trump or not, he often “overpaid” for properties that turned out to be bargains in the end. Microsoft at $15 billion market cap at valued at 100x forward revenues would have turned out to be a bargain. Of course it would be considered a bubble - like so many saw Amazon (but David Gardner at $800 million market cap), and rightfully so. What Microsoft did was so rare almost no one should have considered it anything else…except, if you understood the CAP and the total TAM/SAM.

In the end something is not worth its multiple, its worth what it is worth. The best measure of that is enterprise value to opportunity, with a floor on buy out value. The degree to opportunity is not just that it is selling into a $100 billion market (automobile companies sell into enormous markets larger than even that which Nutanix can define for itself). Does not make them great investments due to their lack of CAP and growth and the opportunity being eaten into.

Investing is art and science, but mostly art disciplined by science. If it were science all returns would be precisely in the stock price adjusted for risk-factor. And what the market gets wrong is CAP. The ability to create increasing returns for long periods of time x hyper-growth.

That is our advantage. Investing is also not just art disciplined by science, but also a mental game. The ability to lock out the random walks, the horrible crashes, the incredible heights, and stick with it and persevere.

More of which I hope to discuss both here, on premium Fool boards, and on the new NPI invite only site the I shall try to work on this weekend.

Tinker

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Tinker,

Emailing you this and posting.

Please do not discuss any new “invite only” properties you plan to make on these boards.

The Motley Fool provides these for free but they are not to be used to promote our own sites or forums.

Also please keep politics out of the conversation here on Saul’s. Many other boards for that.

Thanks.

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Hi,

I’m new here and don’t know the ground rules, and can’t find them. Please forgive me if I broke one or some of them.

Anyway, what about technicals, or how a stock behaves according to the news?

  1. ABMD- I was super late, thought that the tiniest heart pump in the world would bring me to new and higher heights. I’ve lost 30%, despite people saying how great it was, etc. In hindsight, the simple “death cross” that happened months ago would’ve spared me the pain.
  2. Bitcoin- one the major exchanges got hacked in a major way recently- very bad news. The price dropped instantly by 4% and rebounded and reclaimed new heights on the same day.
  3. TEAM- dropped recently on tepid guidance. It came right back the next day.
  4. CYBR- I purchased it 2-3 years ago b/c they focused on “hacking from insiders”-the sole player in that space…It kept dropping after each earnings report, which they routinely beat…I got frustrated, so I sold- only to see it double last year and me not holding ANY shares!

Also, what’s the post number with all the ground rules?

DoesMIWork

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Also, what’s the post number with all the ground rules?

Welcome!
#55331. It’s called Monday Morning Rules of the Board and it’s published every Monday morning. This board is for discussing and analyzing individual growth stocks. By reading the Rules of the Board you’ll get to know the Rules. It’s also strongly recommended that you read the posts on the right panel.

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There was nothing political in Tinker’s post.

…just saying

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Welcome to Saul’s Board,

Portfolio management and technicals are not discussed on this very focused board. It seems that you could profit from reading all the links in the threads below as most of us have, even long-time investors.

  1. For Board Newcomers,
    https://discussion.fool.com/for-board-newcomers-34196166.aspx
    see especially all links given under Saul’s Investing Philosophy.

  2. Monday Morning Rules of the Board

Short version: https://discussion.fool.com/monday-morning-rules-of-the-board-34…

Long version: https://discussion.fool.com/monday-morning-rules-of-the-board-34…

Good luck,

I. M. Young, Assistant Board Manager

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