No. Sorry for my cryptical post. I am very prone to use 4 sentences to cover an 8 paragraph issue. I was taking a great leap to say that a stock’s p/e “should” be the inverse of the treasury 10-year yield. The yield today is 3.77% . The inverse is 26.5. The value investor would want a discount to that. Graham wanted what, a 1/3 safety factor?
So the idea was exactly what you asked, “What has to happen for that?”. There are other theories (of course) on what a “correct” p/e is. I did a quick search and (of course) did not write down the links. There was a MF article that mentioned (did not advocate for) a “correct” p/e of 1. A more common benchmark is a p/e equal to earnings growth rate (rearview mirror approach). That never made sense to me as it seems to give no value to current earnings. The PEG uses a forward looking earnings (forecasted). Saul’s approach was to use a rearview approach with the apparent assumption that earnings growth would maintain the fairly recent growth trajectory–his 1yrPEG. That worked splendidly, until it didn’t. I didn’t because it got discovered and there weren’t any sub-1 1yrPEG’s. Ironically, this was a valuation based investment system which no longer worked because there weren’t any undervalued stocks.
So then came profitless hypergrowth and EV/S, which worked–until it didn’t. And for the same reason. No more 100% revenue growth with EV/S of… 4, 5, 6? And then the metric was to compare peers, the way Bert still operates. The cohort of 60% growers average an EV/S of… 27 and XYZ’s is 20–and tweak for some flavor of cash flow. That stopped working when all the cohort had unreasonable EV/S. Cheaper than ridiculous isn’t necessarily cheap.
A proposed evaluation method was to look at fast growers. Not hypergrowth. More mature growth like Sales Force, Service Now, maybe Palo Alto Networks. What EV/S do they have? (Still can be “cheaper than ridiculous”, of course). 20 or 25% growth is still exceptional from a broad market perspective. Would you take a 25% CAGR? Now you run into the same problem as the DCF approach. Fraught with predictions of future performance and future tech advances and future competitors and present competitors which evolve to eat your lunch by moving into adjacent verticals, etc. It is a fragile model. Highly dependent on at least two factors: 1) The predicted revenue growth trajectory, and 2) Mr. Market’s mental state. "“Mood changes, or swings, refer to abrupt shifts in your mood or emotional state, and may be a normal response to stress or hormonal shifts . However, they can also signify a mental health disorder like borderline personality disorder or bipolar disorder, which is characterized by extremely high and low moods.” Never a shortage of stress in the world and certainly not now. We witnessed and to an extent participated in extraordinary stock investment returns. It is difficult to get weaned from those highs. Perhaps the real question is whether we should be investing in tech growth at all, or to what extent. And if so, pick individual stocks or a broader basket or ETF’s? What basis do I have in choosing between internet security and e-commerce sectors . Between companies, ZS and OKTA. S or CRWD? GLBE or SHOP? Central bank responses to G20 fiscal “policy” has so distorted price discovery that maybe nothing works. Unprecedented actions just grossly inflated asset prices. That’s the reality and we are having to deal with inflation of real goods and deflation of financial assets–and derivatives of financial assets in particular, I believe. For those who are building wealth, I would put maybe 15% into a basket of high growth. 40% into small cap ETF. 45% into midcap value. Something like that. Every month. Would I do that? Probably not, but do as I say, not as I did/would do.
Dreamer has outlined his target, at least time-wise. Dreamer, you are taking on risk in order to protect your capital (shorting and buying puts). In your situation, I would consider very short term treasuries that are yielding 5.5% to 6% right now. I don’t know how easy that is to do. The treasury that I have was issued 10/15/2020. I purchased on 9/23/22. Maturity is 10/15/23, so it was 13 months out. Coupon yield is… drum roll… 0.12%. Current 3 year is 4.23% so that is a reference to the disruption the market has endured. 33 times increase in yield. Poor SVB, eh? (I paid only $95.90 so I didn’t invest for 0.12% yield). Here we have a wealth builder, a close-to-retirement guy who wants/needs “just a little bit more”, and an old guy 20+ years into retirement who needs the wealth to last another 19 years (28 for DW). And each owning, or willing to own at “right price”, DDOG. And, I suggest, all not qualified to determine “right price”, which quite probably is not knowable anyway.
What has to happen for DDOG to get to p/e of 25? Maintain a 10% per year reduction in revenue growth rate from its rate 6 months ago while maintaining GM and reducing SG&A to % of revenue to those of the mature growers. Dreamer modeled a much more rapid decline in revenue growth rate than I did. He is waiting for a correspondingly much lower price. I have 5.4% of port in DDOG, up 20% on the position established December, January, February and March.
Throwing rocks at the moon, folks.
KC
