We often get comments about how ZS or another company is particularly highly valued, so I spent a little time this weekend putting together a spreadsheet to try to compare them against one another based on where some of the numbers sit right now. This is far from scientific, but I think it is useful to see which stocks may not have grown into their valuations as much as others just yet.
I started with the latest quarter’s revenue (whichever quarter they last issues a 10-Q on), gross margin dollars, and revenue growth to compare against the market caps for the stocks below. I tended to focus more on the price to gross margin dollars rather than price to revenue, given that the net margin is what the company ultimately keeps and uses to fund operating expenses, capex, potential acquisitions, etc. I note that NTNX in particular has still been evolving away from their hardware, so their margin % is expected to keep growing and should lead to much higher revenue growth overall in coming quarters compared to the past year (e.g. the TWLO uber effect)
Everything is in $millions. PYQ Rev is the equivalent quarter of the prior year.
Latest Q Rev Latest GM$ GM% PYQ Rev growth Market Cap AYX 54 48 89% 34 59% 4,410 DOCU 178 133 75% 131 36% 8,860 ESTC 64 45 70% 37 73% 6,440 MDB 65 47 72% 41 59% 5,380 NEWR 124 104 84% 92 35% 6,140 NTNX 313 239 76% 276 13% 9,610 OKTA 106 76 72% 67 58% 9,360 SHOP 344 186 54% 223 54% 19,710 SQ 882 353 40% 585 51% 31,280 TTD 119 119 100% 79 51% 6,840 TWLO 169 92 54% 101 67% 13,190 ZS 63 51 81% 40 58% 6,130
By taking the last quarter’s revenue and annualizing it (multiply by 4), I get these price/revenue calcs:
P/R NTNX 7.7 SQ 8.9 NEWR 12.4 DOCU 12.4 SHOP 14.3 TTD 14.4 TWLO 19.5 AYX 20.4 MDB 20.7 OKTA 22.1 ZS 24.3 ESTC 25.2
and this is the order when I take price to gross margin $ (again annualized):
P/Margin NTNX 10.1 TTD 14.4 NEWR 14.8 DOCU 16.7 SQ 22.2 AYX 23.0 SHOP 26.5 MDB 28.6 ZS 30.0 OKTA 30.8 ESTC 35.8 TWLO 35.8
Naturally, the companies growing the fastest (and expected to continue to grow the fastest) would have the highest P/Margins, I was a bit suprised to see TTD so high on the list given that their growth rate is high.
So I wanted to factor in the revenue growth.
This is what it looks like when I simply divide the P/M by the growth percentage (e.g. taking Twilio’s 35.8 and dividing it by the 67% growth they had in the more recent quarter:
P/M/Gr TTD 28.4 AYX 39.0 NEWR 42.4 SQ 43.6 DOCU 46.4 SHOP 48.8 MDB 48.9 ESTC 49.0 ZS 52.3 OKTA 52.9 TWLO 53.2 NTNX 75.0
Two of the fastest growers, AYX and TTD show as two of the more relatively inexpensive companies on the list.
To factor in the revenue growth a different way, I projected out the margin $ for each company, for the next three years, by simply taking their revenue growth today, and deducting 5% each year (So Twilio had 67% growth in the latest quarter. I assumed 62% next year, 57% in year two, and 52% in year three). Of course, these are broad strokes/estimates, some companies won’t keep up the growth quite so high and others may actually accelerate their growth in upcoming years.
This is what the price to margin would look like three years from now using today’s price and no change in the gross margin % of the companies:
P/M/3yrGr TTD 5.2 AYX 7.0 NEWR 7.6 SQ 8.0 ESTC 8.3 DOCU 8.4 MDB 8.7 SHOP 8.8 NTNX 9.1 TWLO 9.2 ZS 9.4 OKTA 9.5
pretty consistent order and relative valuation across the last two calculations that factor in the expected growth (although notably NTNX is less of an outlier in scenario 2)
Speaking of NTNX, last quarter the overall growth was 13%, although as they shift away from hardware, that growth is expected to accelerate significantly. In order for them to get near management’s estimate of $3 billion of bookings in three years, they would grow at more than double their current rate, and their gross margin % would increase without the low margin hardware weighing down the overall average.
Playing with the growth % a bit for NTNX, even keeping their third year revenue around $2 billion, would give them a metric of 4.6 for the last calc above, lower (essentially saying the stock is potentially cheaper) than any of them.
Now keep in mind, this doesn’t imply that any of the stocks above are bad investments. I do think that all of them can significantly beat the market averages over the next few years, but this might provide a guide as to where new money, or potentially any allocation shift you want to do for positions that have grown uncomfortably large, could be reallocated to.
I currently have very large positions in MDB and NTNX, more or less about triple the size of my ownership of the other companies on the list. After going through the analysis above, I decided to sell a bit of my MDB (bringing it down from about an 18% position to 15% of my total portfolio) and I sold a small amount of my ZS and TWLO. So I took about 3% out of MDB (which was large) and 0.5% each out of ZS and TWLO. I added a most of those funds equally to AYX and TTD, with a small amount going into NEWR and also to NTNX (which yes, NTNX was already a pretty large position for me, but if they even get close to that $3b booking number in three years, the stock should do remarkably well imo).
I should also note that I did all of this with IRA money. If I only had these stocks in a taxable brokerage account, I would not have made any moves today simply because I think every stock on the list can do very well in future years and there were no positions that I was uncomfortable with or losing any sleep over so I prefer not to pay taxes unless I really feel I’m moving funds to where it will have significant outperformance (e.g. I finally parted ways with the last of my APPL shares last month to put more into some of the stocks above, will pay the tax and feel good about it). This is also why I didn’t trim any OKTA, despite it being last on the list above, as all of the shares I own are in a taxable account and have nearly tripled since I bought them, so I’ll let it run and not incur any income tax to pay right now.
Anyway, there are lots of things that I didn’t factor into this analysis (control of operating expense, capex, TAM, etc) to keep it simple. Most likely the stocks that do the best on the list will be the ones that have their revenue accelerate in the near future (or get acquired at a nice premium in the next year or two). I think some of them will have growth continue to accelerate, but can’t predict which ones those will be (other than NTNX), so without knowing that, this seemed like the best way to compare them against one another.
Anyway, feel free to poke holes in anything that seems wrong. I put it all together fast so might even have some typos in the original data numbers. Hopefully this is useful to anyone else thinking of shifting funds or allocating new money