Here’s an update on where we stand on valuations compared to my original Oomph factor post in mid-April. Have valuations become significantly higher since then? In many cases, the answer is no. Has the EVSO ratio been predictive of the future return? No, not in this short 3-month lookback period.

So let’s dive in to the numbers. Remember that the Oomph factor is the *square* of the YoY revenue growth rate, in multiplier form, multiplied by the gross profit margin. So if a company has 40% YoY revenue growth in the most recent quarter, and has 80% gross profit margin, its Oomph factor O = 1.4*1.4*0.8 = 1.57. The higher O is, the better. We found that companies with O > 2.0 are knocking it out of the park, and extremely rare in the universe of 3,500 or so publicly traded companies.

So what multiple of Oomph is the market paying? That’s where the EV/S/O ratio comes in. It’s simply the EV/S ratio divided by Oomph. So if the company in the above example has an EV/S ratio of 20, its EVSO is 20/1.57 = 12.7. In this case, the *lower* the EVSO ratio, the better, in terms of value.

Again, EVSO is just one of many ways to evaluate a company, and there’s nothing magical or guaranteed about it. You also have to look at TAM, market share, and many other qualitative and quantitative factors. But just as P/E ratios, by themselves, did not accurately value growth companies in Peter Lynch’s time, and he had to divide P/E by G(rowth) to get the PEG ratio, I am using EVSO as a valuation measure for companies with no earnings at all.

So now lets take a look at today’s EVSO ratios compared to what they were in mid April. We’ll also look at the returns since then, and the change in EVSO.

```
Oomph on Oomph EVSO on EVSO Return EVSO
Ticker 4/16/19 Today 4/16/19 Today Since 4/16 Change
====== ======== ===== ======= ===== ========== ======
AYX 2.18 2.03 9.4 11.8 32% +25%
TTD 1.86 1.44 9.7 13.5 12% +39%
ESTC 2.15 2.12 10.7 9.3 -10% -13%
SMAR 2.04 2.17 11.2 11.6 20% +3%
MDB 2.13 2.18 13.4 12.4 10% -7%
TWLO 1.66 1.75 14.1 12.8 8% -9%
ZS 2.16 2.10 15.1 16.2 16% +7%
OKTA 1.64 1.73 15.9 18.3 31% +15%
```

So have things become way more overvalued since mid April? Looking at the EVSO change column, the answer is yes only for AYX, TTD and OKTA. Stocks like ESTC, MDB and TWLO are actually *cheaper* now than 3 months ago, on an EVSO basis. SMAR and ZS are not much pricier either. And ESTC looks like the biggest bargain of the bunch - it’s the only one with an EVSO below 10.

Within this short lookback period, the EVSO ratios from April have not really been predictive of the forward 3-month returns. While it’s true that the cheapest stock from April, AYX, has had the highest return since, the next highest return was delivered by OKTA, the most expensive stock from April.

I don’t make portfolio changes too often. But, based on the above, I’ve trimmed a little off my TTD, AYX and OKTA, and used the proceeds to buy a lot more ESTC and a little more MDB.

And, may I say, I love this board!

Good luck to all,

Ron