Interesting Case Study - SPLK

I thought I would raise a point for discussion on valuation multiples and future stock price performance. An interesting case study for this is SPLK.

So what happened? SPLK’s multiple peaked in 2014 and even though it continued growing its sales rapidly the next several years, its stock price languished as its multiple compressed. The lesson here is how big of a role multiple compression can play in future stock price performance of highly valued companies.

How do we apply this framework to the current crop of hypergrowth SaaS stocks trading at what some would traditionally call “nose-bleed” multiples?



With the benefit of hindsight we can now tell when SPLK went up, down, and sideways over the past 5 years.

Does that help us with ZScaler on what it will do this year, 3 years, or 5 years?

Do we know it will go up another 50% this year? 100%, down 20%?

We have no idea.

But should it be up higher 5 years from now? Yes, if it keeps growing it will.

Some people make a list of P/S ratios and say, “I will buy Stock X because it has the lowest P/S ratio therefore could go up the most this year.”

I don’t look at it that way. The lowest P/S ratio does not have much predictive power of when it will do what. The goal is to hold it because it should be a bigger company 5 years from now. When it does what and how it gets there we have no idea. Our problem is when the stock market starts discounting too many years of growth. Looking right now it seems a good 1-2 years of growth are built in to stocks.

I don’t expect a stock to maintain a P/S ratio of, say, 20. If it keeps growing at 50% a year, that means you could buy it and make 50% in one year. Who wouldn’t jump on that? A premium has to be built in. The stock market does not make things that obvious.


The goal is to hold it because it should be a bigger company 5 years from now.

Saul did pretty good past 2 years. None of those were stocks owned 4 or 5 years. Possibly 3 years, but would have to check. The 2018 port was pretty much all a year or newer holding.

Sauls approach works for him, but requires more time and attention. The LTBH approach works when the right stocks were chosen and outperformed over a 5 year period.

A lot can happen in 5 years in a rapidly evolving tech/cloud landscape.



Lets be careful that this doesn’t move into OT territory. Feels like it’s headed that way.

Thanks everyone.