Portfolio Valuation Update.

Investment Analysis Clubs Saul’s Investing Discussions
1

As we go into earnings I think it is helpful to have an idea where our stocks are in their valuation ranges. Here is a brief summary where some of our stocks are from an EV/S standpoint. My usual warning applies about EV/S. In general I don’t think it is super helpful to compare company A’s EV/S to company B. I find the EV/S to be more useful to compare a company to itself.

AYX - EV/S range of 13-23. Currently sitting at 21.3… With the stock market hiccup it got down to 16 (i bought a fair amount). The lowest I have seen it was 13 when there was a brief concern that tableau was going to eat their lunch. I also bought a bunch then. Assuming AYX hits or exceeds their guidance for next quarter then the EV/S would be 19 and possible a bit lower. Some space for price appreciation due to awesome revenue growth and minor ev/s expansion.

MDB EV/S range of 15-22. Currently sitting at 16.5. About the same as during the stock market hiccup. Depending on what you think about amazon this is either a great time to buy or a wait and see time. Personally I sold ? of my position at 80. Price is at 72 right now. I’d buy back in if the price gets low enough because I don’t think the amazon thing will affect MDB for a few quarters. If the markets decides to disregard amazon because next quarter will likely be very strong then we could see significant price appreciation. EV/S would be 14 if they hit their guidance.

OKTA EV/S range of 16-24. Now at 20. In december it got down to 16 and was a screaming buy in my opinion. If they hit their guidance their EV/S will be 18.5. I have a big position so I’m not buying. I’d happily buy them at this valuation if I did not own so much.

TWLO EV/S high of 16.5 (not sure on the range), dropped to around 13 in december. If they hit their guidance then ev/s would be 14.5. Great buy for a business standpoint, not so much from a valuation standpoint as they are at the tippy top of their valuation. Having said that…twlo had been doing awesome

ZS EV/S range of 18-24 with a very brief stay above 28 until the market came to its senses. Now at 23.8. They got down to 18 in december. I bought some. EV/S would drop to 22 and change if they meet their guidance. I see them as fairly valued right now. I’m not looking to add any at these prices. If i didn’t have a position I would happily start one at this value.

SQ EV/S peaked at 32 based on adjusted revenue (the revenue we should be looking at) now is 19, got as low as 15. I still have a large position in SQ. Normally I would be adding in times like this but I haven’t because of the management shuffle and they are forecasting higher expenses which I don’t think the market is going to take super well. I’ll happily be wrong on this one.

VCEL EV/S of 8, was around 6 in december. Next few quarters VCEL is going to show us if they can grow beyond the market that they had with carticel. If they do this will be a cheap price for them. If they don’t…well then this won’t be! Personally I think they are going to knock it out of the park. I have plenty and I’m not buying more. If i didn’t have a position i’d be happy to start one now.

NTNX EV/S of 5-10, now at 6.4. Next two quarters we will start to see reacceleration of earnings growth, or said another way, revenue growth will become unmasked. I’ve been buying, I think this one is a buy. Might not see price appreciation this quarter, but by next quarter I think we will.

best,
Ethan

114 Likes
2

Thanks for your post. Very timely for me as I have been thinking about the EV/S numbers. My questions are related to what is considered low, medium and high for the companies we invest in here on Saul’s board. How do you determine that? Is it just a matter of looking at the range or something else to determine this? Thanks.

Warmly, John

1 Like
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John, I think you bring up a really good question. First some general comments on valuations. In my opinion there is no absolute in valuation. What I mean by that is that you can’t takes a few EV/S ranges like 1-5, 6-10, 11-20 and say a company that is growing 30% should be in the 6-10 range. Instead I think that valuation is more of a reflection of market sentiment and relative opportunity. A decade ago an EV/S of 20 would have been ridiculous, now we have multiple companies that sports high ratios and look like they can justify those ratios if they continue this sort of growth for a bit.

Now more specifically on how I use valuations and in response to your question, I think it is more of a matter of looking at a company’s range and what is going on with the company to see if they are a good value. In December a bunch of our companies dipped into the lower side of their range without their business prospects changing. In contrast, Amazon has introduced some uncertainty in MDB’s prospects so now they are on the low end of their ev/s range. In my preamble I said, “My usual warning applies about EV/S. In general I don’t think it is super helpful to compare company A’s EV/S to company B. I find the EV/S to be more useful to compare a company to itself.”

-e

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Thank you, Ethan.

John

5

Great commentary Ethan, thanks for the insights.

Some other examples, without the insights [slightly different numbers, probably because of different EV calculations]

cheers
Greg


#### ABMD [last price: 315.25]
|EV/SALES       |10.4 -----X---- 32.6|[19.90.  right now it's about average... ]

#### AMRN [last price: 17.12]
|EV/SALES       |3.6  ---------X 33.2|[24.81.  right now it's very expensive]

#### ANET [last price: 215.58]
|EV/SALES       |5.1  -X-------- 13.9|[7.17.  right now it's very cheap]

#### AYX [last price: 64.98]
|EV/SALES       |9.5  ---------X 22.1|[20.83.  right now it's very expensive]

#### ESTC [last price: 71.32]

#### MDB [last price: 73.74]
|EV/SALES       |12.6 ---X------ 21.7|[16.42.  right now it's moderately cheap]

#### NEWR [last price: 85.11]
|EV/SALES       |6.2  ------X--- 16.9|[10.80.  right now it's moderately expensive]

#### NTNX [last price: 45.55]
|EV/SALES       |2.6  ------X--- 9.0|[6.16.  right now it's moderately expensive]

#### OKTA [last price: 70.48]
|EV/SALES       |9.5  --------X- 23.6|[20.52.  right now it's very expensive]

#### PAYC [last price: 124.57]
|EV/SALES       |8.4  ------X--- 19.3|[13.68.  right now it's moderately expensive]

#### PAYC [last price: 124.57]
|EV/SALES       |8.4  ------X--- 19.3|[13.68.  right now it's moderately expensive]

#### PSTG [last price: 16.98]
|EV/SALES       |1.9  -X-------- 5.0|[2.58.  right now it's very cheap]

#### SHOP [last price: 149.10]
|EV/SALES       |11.2 -----X---- 27.3|[18.41.  right now it's about average... ]

#### SQ [last price: 65.18]
|EV/SALES       |2.5  -------X-- 14.5|[8.88.  right now it's moderately expensive]

#### TTD [last price: 128.49]
|EV/SALES       |5.8  -------X-- 16.8|[12.75.  right now it's moderately expensive]

#### TWLO [last price: 97.76]
|EV/SALES       |5.1  ---------X 17.9|[16.38.  right now it's very expensive]

#### WIX [last price: 99.29]
|EV/SALES       |6.6  ------X--- 12.5|[9.79.  right now it's moderately expensive]

#### ZS [last price: 45.01]
|EV/SALES       |22.9 ---------X 30.3|[30.11.  right now it's very expensive]
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6

Greg - I love it. Nice job thanks for taking time to calculate and format!
Ant

7

Ethan, one seriously important background factor to bear in mind which you do not mention: the probability that the one of the two stimuli for asset-value multiple expansion across the board, which have boosted the market for a decade or so, has slammed into reverse (and is now called QT), while the other seems to be static, not up, only because central bankers are nwo discovering to their horror that they cannot raise rates in the good times (to prepare for lowering them in the bad) owing to the appalling total national debt.

The reason I play this game with under 10% of my portfolio as a trading game is simply that I do not trust the multiples, whether EV/sales or anything else. Saul does not much care what they are and he has been right. But I think the market does not care much what they are either and if it feels like halving the valuation ratios or more of high-flying momentum plays, might easily do so.

We need sales to hold up and momentum to hold up to rationalise the prices we pay. I certainly agree the difficulty of comparing with the past makes the job of valuation even more difficult!

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Thanks Ethan

A link for the more visually inclined - easy to adjust the tickers.

Note that for SQ they use total revs rather than adjusted

https://stockrow.com/interactive_chart/e73e71d4-2cd0-4a77-97…

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My apologies - the first link is the P/S

EV/Sales is here

https://stockrow.com/interactive_chart/a9e50e61-7214-4f60-9d…

Operational metrics are available here

https://docs.google.com/spreadsheets/d/1T9AO9ZMUAtVms4hzvbtX…

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Ethan,

Sorry to pick your post apart but I’m way off what you got on Square:

Share Price: 65.18 (close yesterday)
TTM Sales: 1,405m
Cash minus Debt: ~1,000m (1.8b cash and 800 or 900 debt, I think)

Fully Diluted
65.18 * 495m -1,000m divided by 1,405m = EV/S of 22.3

Not counting potentially diluted shares
65.18 * 474.9m -1,000m divided by 1,405m = EV/S of 21.3

How’d you get 19?

Bear

1 Like
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Great chart, tchalla, I’ve bookmarked that website!

What strikes me is that one year ago, ALL of the stocks selected had an EV/S less than 11 (at that time, SHOP was still held by most here and it was pushing the upper limit at 15). There has been quite the multiple expansion, only time will tell if it is supported. That was definitely a good time to get into these stocks.

It’s not going to change what I have invested in these stocks, but it does give me pause…

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don’t be sorry! It is great to have another set of eyes.

numbers will be a little different because we used a different share price so I’ll redo it with your price.

Share Price 65.18
TTM Sales: 1406 (i probably rounded from 1405)
Cash : Cash and Cash like 1.17 billion from the 10-q, are you adding in long term assets of 534 million? which would get assets to 1.7 billion? If you are, i don’t think you should be.
Debt: Debt from the 10-q 897 million (round to 900 to make it easy).

So that gives us cash - debt: 227 million.

share count
from SQ’s 10-Q
As of November 2, 2018 , the number of shares of the registrant’s Class A common stock outstanding was 308,397,662 and the number of shares of the registrant’s Class B common stock outstanding was 105,099,942
if you add those together you get 413497604, which i rounded to 413 million but should have been 413.5.

413.5*65.18 = = 26,951.93 market cap - 227 milion
divided by 1406 gives an EV/S of ~ 19.

Our other numbers are close enough to not make a difference, Shares outstanding looking to be the main issue.

BTW, I did find a small error in my spreadsheet due to you, so thanks!

-Ethan

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oops quick reply. You absolutely could add in long term assets. My brain was briefly not working when I typed that.

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by long term assets I meant investments. I’m stepping away from the keyboard now.

15

Ethan,

One reason it’s important to use diluted shares is that the company typically uses these for their EPS calculation (both GAAP and non-GAAP). As Saul states in the KB: The company will always list Basic EPS and Diluted EPS (as well as basic shares outstanding and fully diluted shares), but when people refer to Earnings per Share, they are almost always referring to Diluted EPS.

From the Square Q3 shareholder letter https://s21.q4cdn.com/114365585/files/doc_financials/2018/20…

GAAP EPS: Net income per share was $0.05 and $0.04 on a basic and diluted basis, respectively, for the third quarter of 2018, based on 410 million weighted-average basic shares and 475 million weighted-average diluted shares.

Non-GAAP EPS: Adjusted Net Income Per Share (Adjusted EPS) was $0.13 based on 495 million weighted-average diluted shares for the third quarter of 2018

Since we always use non-GAAP EPS here on the board, I really think 495 million is the right number to use for Square.

Bear

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We will just land on different sides of this one:) market cap is calculated from shares outstanding, EV is calculated from market cap. I don’t think it matters as long as you calculate it the same way for your own numbers.

17

First of all, sarksnz’s post shows the correct 8.88 EV/S for SQ.

#### SQ [last price: 65.18] |EV/SALES |2.5 -------X-- 14.5|[8.88. right now it’s moderately expensive]

versus

Ethan’s 19 EV/S for SQ

SQ EV/S peaked at 32 based on adjusted revenue (the revenue we should be looking at) now is 19, got as low as 15.
—————————————————

Bear chimed in:

Sorry to pick your post apart but I’m way off what you got on Square:

Share Price: 65.18 (close yesterday)
TTM Sales: 1,405m
Cash minus Debt: ~1,000m (1.8b cash and 800 or 900 debt, I think)

Fully Diluted
65.18 * 495m -1,000m divided by 1,405m = EV/S of 22.3

Not counting potentially diluted shares
65.18 * 474.9m -1,000m divided by 1,405m = EV/S of 21.3

How’d you get 19?

Ethan’s response:
413.5*65.18 = = 26,951.93 market cap - 227 milion
divided by 1406 gives an EV/S of ~ 19.
————————————————————————

It appears that Bear and Ethan are using the wrong TTM Sales $1,405 million and 1406 for SQ, as shown in bold above.

The correct TTM Revenue for SQ is $2,981.684 million.


$   616.035 M (Dec 17)
$   668.603 M (Mar 18)
$   814.938 M (Jun 18)
$   882.108 M (Sep 18)

$ 2,981.684 M (TTM)

Plugging in the correct TTM Revenue in Bear and Ethan’s calculations yields 10 and 9, respectively, which are a lot closer to Sarksnz’s 8.88.

Ethan, is your adjusted revenue (the revenue we should be looking at) the same as TTM for SQ? If not, please clarify.

Regards,
Ray

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Hi Ray,

I think Bear and Ethan are using adjusted revenue (cos they’re experts and adjusted is harder), while I’m using GAAP (cos I’m lazy and GAAP is easy).

So ‘correct’ can mean different things to different people. In this case, I’d suggest that the adjusted might be more correct than GAAP, given the nature of the business, but the location in the range is probably the most interesting.

cheers
Greg

3 Likes
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Hi Greg,

My question is which TTM Revenue represents the most correct/appropriate/representative EV/S ratio, i.e., Total Net Revenue $ 2,981 million OR Adjusted Revenue $1,406 million (total net revenue less transaction-based costs and bitcoin costs) and why? The gap is huge, 9 vs. 19 for EV/S.

Because SQ is unique, perhaps both can be used, provided revenue is clearly defined.

Most financial sites use Total Revenue in their EV/S calculations (not saying they are the final authority).

Regards,
Ray