If I divide the total April trading days into a 40 minute game - it comes out that each trading day represents about 1 minute and 40 seconds.
Up to todays close I was up a bit for the month even in spite of both the ENPH and MBLY debacles. But then…but then…NET, the company that should have had an easy breakaway ER dunk for a 5 point lead blew it. They turned the ball over and in frustration fouled the market and then got a tech for poor sportsmanship. So now the portfolio is basically Tied with the Market for the April game.
So all month - the bobbing and weaving, the TBs, the portfolio active management with aggressive substitutions - it all comes down to tomorrow. Tomorrow’s 1 minute and 40 seconds. Since it appears that NET will follow through tomorrow on its contribution to my very own trifecta of bad Earnings Reports, the team will be in the hole right at the open. And since it is likely that NET might take a few of its related companies down with it - I am going to need a pretty good rally to close out the week.
Are you holding NET? basing on how PI, MBLY acted if tomorrow is red day we might expect this hit hard like another 10 to 15%. i sold all at 45.50 with big loss. why can not move this money to PI or MBLY or ENPH or ENVX which already beaten and worst priced in ? i moved some money to ENPH & PI & ENVX. i know they also fall but hoping these fall less
I put both Crowd and DDog back in the portfolio for exactly that reason. And I am thinking of holding NET and seeing how low it goes - then adding to that as well. Might put SNOW and Bill back as well.
As long as we have the fortitude, and patience to wait the storm out - the companies you mentioned will most certainly recover.
From a basketball perspective - our teams have been chock full of 4 and 5 Star players who can get up and down the floor quickly and as long as the market was trying to play man-to-man we had the talent (growth) on our side. Now the market has went to a zone and cares less about growth. So our players just pass the ball around and then put up a forced shot at the buzzer: definitely not our style.
Anyway - I do believe you are on the right path as long as you are selective in your overall roster and have the stomach for just hunkering down and taking the beatings for another couple of quarters.
I find it useful to take a step back and assess damage already done. I usually do a bit of quick napkin math and derive new multiples myself. For example in Q3 last year, I jolted down “NET @ -14% → LTM EV/S ~16, MC ~$14b”. Such exercises helps keep sanity, gauge whether the worst is priced in, and inform my decisions.
Here’s a part of some much more elaborate calculations (that might contain errors). They’re based on a before earnings market cap of roughly $19.8b. The previous FY guide called for 36.9% growth at midpoint. For NTM I’ve taken the midpoint of revised FY guide (31.5%) and simply rolled it forward. Looks like the algorithms’ initial reaction did the same.
Price
Market Cap
EV
P/S
EV/S LTM
EV/S NTM
EV/S NTM (Old FY guide)
$45
$14.9b
$14.8b
14.2
14.1
10.7
10.3
$44
$14.6b
$14.5b
13.8
13.8
10.5
10.1
$43
$14.3b
$14.2b
13.5
13.5
10.2
9.8
$42
$13.9b
$13.9b
13.2
13.2
10.0
9.6
$41
$13.6b
$13.5b
12.9
12.8
9.8
9.4
$40
$13.3b
$13.2b
12.6
12.5
9.5
9.2
Going in to earnings, NET had a P/S slightly above 20 and a forward multiple slightly below 15.
For reference, as of yesterdays close DDOG and CRWD had a P/S of 13-13.5.
Thats a pretty good way of looking at potential entry points for former high flyers.
One thing though - and for whatever reason, I always drift back to this in the perpetual risk on-risk off market tides: Just because a General has been demoted to a Lieutenant doesn’t mean that the Lieutenant can’t be further demoted to Corporal.
I like your reasoning and its a great starting place.
Would it be possible for you to please explain this. I have been trying my best to have some mechanism of valuing stocks, and haven’t really found any…I have tried to rely on Morningstar or CFRA but either they have been spectacularly wrong on valuing multiple stocks or they have been totally misleading (I am talking about the values they gave for many of the above or Sauls stocks since Dec 2021…none more illuminating than UPST but that is for another day!)
Given the way I view people, I want to believe that they have just been spectacularly wrong…and I fully appreciate that what you say should not be deemed as financial advice…However, I would greatly appreciate if you could expand on what you wrote above, so that I can at least try to attempt to get my head around this…( I am very new to this, so apologies of this is a stupid question!).
What formula do you use for the napkin math? I guess I should ask you for the longer version, but I want to start with baby steps before doing that. So, if you could explain that, that will be golden!
I am ashamed, but using some variables, I am guessing you calculated MC referring to market cap? And how does the calculation of market cap help with regards to assigning reasonably acceptable stock price.
I believe that table you quoted below has some pretty useful metrics, but unfortunately, I don’t really understand the correlation. Would it be possible for you to explain this?
I have been just down and out consumed by my losses but I feel a more healthier way would be to learn more earnestly some of the nuances which would have helped me with what is the most important golden rule of investing advocated by Mr. Buffet:
“The first rule of an investment is don’t lose [money] . And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.”*
I’m guessing we both picked perfect times in history to mess around with stocks. What I’ve found is that the only way to survive in this market is to learn and find your way to your own methods and approaches. I came up with various “tricks” in 2022 to navigate around weak spots. Lots of things on that general subject, but that’s for another day.
Anyway, about your questions…
To spare me from writing the longer version, here the longer long version.
The first rule of quick napkin math is to avoid math. Share price, MC (market cap), EV (enterprise value), P/S etc are readily available, and you can use Yahoo Finance, for example, to set up a watchlist with various columns and have the information right in front of you:
Another option is Koyfin. Lots of capabilities, but takes time to get used to. Here’s an example:
So, at market close, you already have the numbers. Then when earnings comes out you notice that the share price takes a nosedive, and want to figure out what market cap that translates to. All you need to do is to take the market cap and adjust for the drop, i.e. if the share price is cut in half, then logically the market cap is cut in half.
For the multiple(s), things get a bit more complicated. Let’s assume that the market’s reaction is “whatever…” and there’s no change in share price. You look at the earnings release and notice that revenue (sales) have grown. That implies that the stock have gotten cheaper on a price to sales basis. A simple way to account for that is to divide the P/S by the growth in revenue.
One way to do this is to compare the total revenue of the last four quarters ( = LTM, Last Twelve Months). For example, let’s say that before earnings, the LTM revenue was $1B, and now - counting from the reported quarter - LTM revenue sums up to $1.1B. That’s a 10% increase. If the share price is unchanged and the P/S was 10, then the new P/S becomes:
New P/S = 10 / 1.1 = 9.1
Let’s say that the share price took a -20% nosedive instead. The new P/S would then be:
New P/S = 10 / 1.1 / 1.2 = 7.6
That’s the essence of this napkin math. Tools like Koyfin will give you updated multiples, although not on the spot. So there’s no need for elaborate calculations if you just want a rough estimate on something.
My “NET @ -14% → LTM EV/S ~16, MC ~$14b" last year was just a rough approximation because that’s all I needed for that occasion. As usual, when a stock drops, there’s a lot of emotions, and posts and reactions are often colored by whatever happens to the share price. I felt the Q3 earnings were fine, but the stock had held up to well. Jolting that down was a quick way to arrive at “Yeah… nothing strange about that” and gauge a potential buying opportunity.
Correct. Would have been better to write market cap instead of MC in that table. Regarding valuation… Feels like there are countless of methods and ways of attempting to come up with a “fair value” and you can arrive at broad range of conclusions. Analysts will come up with all kinds of interesting price targets.
Market cap is one thing to look at, but it only helps you within your own framework and understanding. You can compare it to other companies and draw your conclusions. For a company that you know well and studied a lot, you might have developed a sense of what you find it “should” be worth. I also find to be an easy and helpful tool to put bounds on expectations. For example, lets say you have a company with a $100B market cap. Amazon currently trades around $1.1T, so if you’re expecting the company you’re looking at to 10x in value you might be asking for a lot.
Not sure I understand the question. Anyway, the table is from a spreadsheet I made, i.e. the total opposite of napkin math. What’s shown are a few metrics at various share prices. P(rice)/S(ales) and E(nterprise )V(alue)/S(ales) are almost the same thing. The difference is that P/S uses market cap instead of enterprise value.
So essentially, what you have there are two valuation metrics (multiples) based on revenue. One backward-looking (LTM = Last Twelve months) and one forward-looking (NTM = Next Twelve Months). To calculate EV/S you take enterprise value and divide it by revenue. (Same for P/S but using market cap instead.)
Backward-looking is straightforward, since we know the revenue. Forward-looking, however, is based on a forecast. We don’t know what the total revenue for the next four quarters will be. The correlation between them is the (assumed) growth rate. If you take a multiple from “EV/S LTM” and divide it by 1.315 (i.e. 31.5% revenue growth) you’ll get the number show in “EV/S NTM”.
Cloudflare is a high confidence position for me, but the stock is not for the fainthearted. From a valuation standpoint, there’s no need for such a detailed table, and a metric like P/S might be a blunt instrument for this particular company. I’ve become quite acquainted with it, however, and wanted to answer the question “Ok, here we go again… so how hard is it gonna hit me this time?” faced with an earnings call that was seriously challenging to pick apart.
Thanks so much Raylight. This is extremely helpful!!
I have one follow up question if I may- So, lets say, we have stock A with a EV/S LTM of currently 10.
With 3 different revenue growth projections:
20% projected revenue growth - the EV/S NTM will be 10/1.2 = 8.33
30% projected revenue growth - the EV/S NTM will be 10/1.3 = 7.69
40% projected revenue growth - the EV/S NTM will be 10/1.4 = 7.14
I can certainly appreciate that if Stock A which was initially expected to grow at 40% are now suddenly saying that it will grow at 20% will be received poorly, and the EV/S NTM will become higher. However, what I was trying to understand was how do we decide what is the fair valuation in the new scenario of 20% growth - Is a 25% share price drop reasonable or can it drop by 50% or perhaps even 75%…
In other words, is there a reasonably good way to use the prior EV/S and new EV/S NTM (based on the projected growth) to re-value the stock…
I would be careful of Snow. It is a consumption model and right now anyone holding it is rolling the dice that their consumption has not gone down. I like to track the High and Low P/S of stocks that I follow. Snow’s High P/S is 206.25 and it’s low is 18.58 (By my calculations) Snow is a very good company but it’s P/S is 23.07 right now so closer to the low but in this type of market it wouldn’t take much to send it down to a new low. Their earnings date is 5/24/23.
I know you are more of a fundamental investor…for example, I think despite enphase stock performance recently, you have no problem holding…however, I also see your view on SNOW…of course, I have now understood that any of these high growth non profitable stocks can fall a lot if the earnings report have the slightest blip…And that is probably true for any of the above stocks that Champ mentioned…So, is there any specific reason that you highlighted SNOW alone… I am trying to see how you differentiate the wheat from the chaff (or the converse, bad apples from the good ones)
I know SNOW had a bad miss on the last ER…And they already had a fall in stock price on that basis…Is there any specific reason that you feel this trend is likely to continue for the coming quarter(s)
I know you are trying to figure all this out and it is very perplexing. It is for all of us. I am not an expert and the more I learn the more I realize just how little I know. But let me explain my thinking and take it for a grain of salt. Because it isn’t that I am correct, investing isn’t like that, it is that I think I am more likely correct but I am willing to change my mind if proven or more likely wrong.
Snow I have been following for a long time and have owned it at times but have sold out at times. They do not have any earnings, Their Revenue growth has been slowing, but they have very good FCF Margins of 24 percent Year over Year (YOY). So looking at that as long as they are FCF positive they will not go bankrupt because they are able to run their business on their FCF. But the problem is they do have a very high, and have always had a High Price to Sales (PS). It sits at 23 and in this market with a recession coming on my thinking is that is just to high. 23 x sales Charlie is an enormous PS. While it would probably be ok in a bull market it is not good in a bear market. Plus they run a consumption model, so business’s can cut back on their use of Snow at a moments notice. That is what has been happening in the cloud companies and will probably go on for at least the end of the year. So my call on Snow is more of a short term call, because I think I can get it much cheaper. I want to own Snow, I like Snow, just not at this level. I think their consumption model is going to drag down their Revenue more. All the cloud companies, including Amzn, Goog, and Msft have noted slower cloud growth.
Enphase is a much different company, They are growing Revenue faster than Snow although it is being guided next quarter to be as fast as Snow, I think that could be a little sand bagging, They actually have earnings and their FCF margin is at 31 percent. That is pretty amazing for any company. They build out Solar panels, Inverters, and Batteries. The IRA bill just became law and that should help with Enphases gross margins there by making them more profitable. While they stumbled in the United States last quarter, largely because of California, they are growing really well in Europe. I think California will surprise to the upside next quarter because of the change to NEM2 to NEM3, what I have been hearing is that people have been putting in more permits to get in under the NEM2 rules. Also Enph is selling at a P/S of 12. So Charlie that is why I am willing to hold Enphase and keep out of Snow. One (ENPH) I believe will do better and one (snow) I will think will do worse.
One thing about companies, that will keep you from making huge mistakes Charlie, and taking positions in companies that might be to big a position, is what you need to think about. If a company has no Revenue it is a hype company, a story stock, nothing I want anything to do with because if they can’t sell anything but their story are they really a company?
If a company has High Revenue growth now you are talking, but they also need to have high gross margins and you want to see their costs such as S&M, R&D going down so that their Operating margins will be going up. This is a case by case and you need to understand the path of the company and how they are going to grow.
If a company has High Revenue Growth, FCF positive, now you have me excited. Because with FCF they can run their company forever. They really don’t need to have earnings case in point Amzn, CRM, Snow. I really do like Snow just not right now at this time.
Now if a company has High Revenue Growth, FCF positive, and earnings, well this is almost the holy grail. Because a company like that is a cash cow, unless their Revenue and earnings come down. That is where Enphase is at now. It’s growing fast with great FCF. The only problem is they do have debt.
This is the best category. A company that has High Revenue Growth, FCF positive, Earnings and no debt. That is a company that we all want to own and keep. The problem is that when you find that type of company, usually their growth is slowing and they are getting so large that it is something that no longer excites me.
I hope that helps Charlie, but that is only my view point, there are a lot more people out there with their own.
Thanks a lot Andy! That helps a lot. It certainly helps to vet the stocks based on these criteria to see how each fares…Are there any specific screener criteria you use for these metrics such as P/free cash flow less than a specific number or revenue growth or EPS above a certain number etc.?
The one thing which I feel would help me a lot is to get some idea of being able to project what may be the stock price in say 10 years time if the revenue growth is at 20% for the next 5 years, and the free cash flow increases year over year etc…
I guess I am stunned that a company such as DDOG or CRWD or ZS or SNOW that were darlings until recently have been totally cast aside…I certainly appreciate that several investors have been phenomenally successful by ruthlessly cutting off when their high expectations are not met, and they have been right so far (lightspeed, amplitude, fastly etc)…However, what I dont get is this:
Sure, if a stock A that was previously growing at 50% suddenly dropped its revenue growth to 30%…The market will re-rate its value and the stock price can fall a lot, say by more than 50%…
However, if DDOG continues to grow revenue at 30% year over year for the next 5 years, is it not reasonable to expect that it will double from its current price …Or is there no such correlation available?
I keep it simple Charlie and have a watchlist of stocks with their High P/S and Low P/S on it. So its a value method because if you buy something towards the low end of it’s P/S that chance of it falling further is lessened. Also I want to make sure I have the companies that are the best on my watchlist and in my portfolio. Those are usually ones that are growing very fast but sometimes they have a low P/S or P/E also. I track the price of these companies on a spreadsheet for each quarter and the low and High P/S along with all relevant financial information. Here is a spreadsheet on DDOG.
Now DDOG is a great company and I still own it. Look at the next quarter though, They are expecting Revenue Growth of 29.4 percent. They have really dropped and that is because Cloud is still slowing down but I still think it is a great company. Look at the FCF Margin, 21.10 percent. It is sitting at a P/S right now of 12.39, that is right at the bottom of their P/S range and is one of the reasons I am still holding them. I can’t sell them when they are this low. But I will probably get hammered in the next earnings call because all of the cloud is getting whacked.
That is what happens to companies in a recession. I like Crwd also and have held it since its IPO. All of those stocks will be coming roaring back in about 6 months time, just watch and see Charlie. It just takes time.
That is very reasonable. Its the rule of 72, 72/30 = 2.4 so in 2 .5 years it should double another 2.5 years double again. I would expect that to happen if it keeps growing at 30 percent from here and by then be profitable.
The thing with SNOW is that they compete to a highly sticky and profitable space like analytics from Microsoft Google and AWS. Those three won’t just give away that revenue. They will play the game with alliances and such but they won’t give up on that. And they have deep pockets, which it appears SNOW doesn’t so they are no longer capable of “buying” workloads through credits, which are accounted as marketing. Hence the decaying revenue.
SNOW story sounds really nice but it won’t be easy for them.
