# Sanity check - predicting the future

Nudged by Dreamers post previously on Elastic (https://discussion.fool.com/still-it-does-seem-that-others-are-s…), I looked at throwing some data at the problem of “what does 30% price appreciation in the next year look like for (some) of our stocks?”

What I did was grab the EV/S ratio for a list of companies, and increased the share price by 30%, then worked out the revenue required to maintain that EV/S.

ie, EV/S = ((shareCount * sharePrice) - (cash + st investments) + debt) / revenue_ttm

I then grabbed the difference in shares between now and a year ago, and called that the share growth rate, and increased the share count as well, meaning more revenue required to maintain the current EV/S.

As an example, for MongoDB it looks like:
MDB
1 year target price growth: 30%
1 year price: 204.40
Current EVS: 27.27
Current EV: 8.4b
Current MarketCap: 8.6b
EV in 1 year: 11.98b
1 year share growth: 8.73%
Current TTM revenue: 308m
1 year revenue to support +30% share price: 439.3m [revenue growth: 42.55%]

ie, \$11.98b / 439.3m = 27.27

What I’m trying to get to is to start being a little bit more “future looking”, so I can look at this roughly and go “Is it likely that ABC will produce X amount of revenue in a year?”.

So, before I go down a rabbit hole of compiling this for all of the growth stocks on the board… does this seem reasonable?

Thanks for the help!

Greg

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Greg,

What I like about what you are doing is taking dilution into account which isn’t typically factored in when determining forward valuations.

But there is an easy way to do this assuming cash and debt stay the same. Or you can just ignore that and use a P/S ratio.

Since you have calculated the share count increase, just take that times the share price growth.

In this instance, we have 1.3 x 1.0873 = 1.414 (41.4% growth).

I think you will find that works.

AJ

5 Likes

Greg,

Just to play devil’s advocate it seems like a lot of work to try and predict the future valuation. There are just too many variables and too many unknowns.

The real value for a company like MDB, or any company, should be gauged by the business fundamentals. Questions like how many customers are they adding? What is the size/mix of those customers? How is Atlas growth holding up? Any new product developments? What do the net retention rates look like? Does news of Amazon getting into MBD’s market cause FUD like we saw in early 2019?

To me these parameters are more important to the future of the company which creates long term value.

If the stock is up 80% a year from now and the EV/S is 50 should I be that focused on the valuation stats? In that time period I just made a ton of money by owning the stock and I know the fundamentals of the company are on the right track.

Sometimes over analyzing the numbers creates too much static. Just something to consider.

4 Likes

thanks AJ, that is a bunch simpler. Mathmagic. I’ll have a play to see if I can get all that down for the ‘Saul stocks’.

Thanks David for the comment, I agree with all of your points. It’s really a thought experiment to question my belief in the fundamentals based on numbers. So, do I think it’s reasonable that MongoDB will have an enterprise value of \$12b and grow revenue at 42% over the year?

Answer: Yes, because they’ve been growing faster than that easily plus the other things you mention. So my confidence is quite high.

But other stocks might not be quite so reasonable. Or more reasonable. For example, SBUX has to grow revenue at around 10% because it’s buying back shares. Maybe that too is reasonable.

cheers
Greg