Saul's stock valuation, a comparison

Investment Analysis Clubs Saul’s Investing Discussions
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Hi everybody,

I did this analysis for my own stocks, but I figured it might interest you as well so I recalculated it for Saul’s portfolio based on his numbers from the end of may report.

I wanted to see how pricy the stocks that I own are and whether I can realistically expect a good return based on the past performance of a reference stock.

Following are the P/S ratios for Saul’s stocks plus the percentage of the stock in Saul’s portfolio:


TICKER	PS	%
ZM	86	19,80
DDOG	42	22,40
CRWD	37	21,40
OKTA	35	14,20
AYX	23	11,50
COUP	37	3,60
LVGO	25	4,00
FSLY	18	3,60

Using weighted average I can calculate that the overall P/S of Saul’s portfolio is 45.

So is this a sensible price for these companies?

For comparison, let’s take AMZN 14 years ago, when it was a $15B company: If you bought AMZN at price to book ratio of 45 back in 2006, you’d be paying around $1200. If you did that, you could sell it for double today, netting you 3,5% yearly gain on your investment. That’s not very encouraging, but maybe it’s not quite fair to compare AMZN with Saul’s portfolio - let’s look at how the companies differ in growth and margins

AMZN vs Saul growth:

AMZN reported YoY revenue growth of 40% from 2006 to 2007.

Here’s what Saul’s companies are guiding for:


TICKER	Revenue YoY Growth Guidance
ZM	46%
DDOG	52%
CRWD	51%
OKTA	32%
AYX	34%
COUP	45%
LVGO	74%
FSLY	43%

Now here it’s a bit more difficult to calculate overall guided growth for Saul’s portfolio, because that’s weighted both by the percentage of portfolio and by the size of the company, don’t have the time to get all the data, so I’ll eye-ball it to 45%.

45% guided Saul growth is not that much higher than the 40% AMZN recorded in 2007.

Saul’s portfolion vs AMZN margins:

I would argue, that Saul’s companies are fundamentally different than AMZN in 2006 - they don’t have the same kind of costs that a physical goods distribution comes with. So let’s look at the margins.

AMZN had a gross margin of 22% back in 2006.

Here’s the gross margins of Saul’s stocks:


TICKER	GM
ZM	80%
DDOG	77%
CRWD	73%
OKTA	74%
AYX	88%
COUP	64%
LVGO	74%
FSLY	58%

Overall the Saul's stock portfolio gross margin is around 77%, that's 3,5 times higher than AMZN

Putting it together
If I try to put it all together:

  1. If you bought AMZN for $1200 back in 2006 you’d get 100% return in 14 years
  2. If AMZN grew by 45% instead of 40%, you’d get 112% return
  3. If AMZN had 3,5 times higher margins, you’d get to around 400% return. Or 11% annually.

So based on AMZN’s past stock performance adjusted by growth and margins, you can expect 11% returns at the current prices of Saul’s portfolio

Please share your thoughts on this.

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Stenlis, nice write-up. I think that the bellwether here is not Amazon but Salesforce. Chris did a great analysis on it and published on this board last year. It would make even more sense to compare CRM to our companies also valuation-wise. Nevertheless, u did some adjustments for GM etc, so, nice write-up!

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Stenlis,
I can’t understand where you got your figures or what you are trying to say, but maybe you haven’t explained yourself clearly, but here goes:

  1. None of us are investing on the premise that we are going to hold all the same stocks that we are holding now for 14 years.

  2. 40% gains compounded for 14 years would give you 111 TIMES what you started with.
    45% gains compounded for 14 years would give you 182 TIMES what you started with.

  3. You are comparing apples and oranges. You are comparing ACTUAL 40% gains for Amazon and GUIDED 45% for our current companies.

If Amazon made 40% it probably guided to 30% so you should be comparing 30% to 45%

  1. Using actual makes more sense since our companies beat revenue guidance 100% of the time. The last time I looked the average revenue growth of my companies for the last reported quarter was over 70%. There’s a hell of a lot of difference between 70% growth with 77% margins and 40% growth with 22% margins.

  2. For comparison, let’s take AMZN 14 years ago, when it was a $15B company: If you bought AMZN at price to book ratio of 45 back in 2006, you’d be paying around $1200.

  3. First of all you are saying price to book for amazon and P/S for the present companies, which I don’t understand.

  4. If you meant P/S of 45 for Amazon in 2006, why in the world would ANYONE pay a P/S of 45 for a company growing at 40% with 22% GM??? Certainly none of us would. So you are setting up a straw man to knock down.

Basically it all is a mishmash which doesn’t make sense.

Sorry,

Saul

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Saul,

Sorry if I’m not clear, I haven’t been using the English language on a daily basis for almost a decade now, let me try to describe what my intention is.

I have never owned a company with a PS of 50 or more before (I do now). It makes me a bit nervous.

I wanted to look at how companies trading that high performed on the market in the past. The problem is I can’t find any suitable ones - the dot com times were too wild, after that companies trading that high were mostly tiny pharma firms with “great ideas” but little revenue and those don’t fit either.

So I decided to simply take a successful, medium sized growth company from the past and adjust the numbers to “imagine” how it would have performed if it had the performance of the companies from the current portfolio.

AMZN fit the bill in the sense that it was medium size and growing top line close to our companies. I adjusted the growth by 12% (because that’s how much more our companies are growing) and I adjusted for margins - our companies have 3,5 times higher margins, so I “imagined” a 2006 AMZN with 77% margins by simply multiplying the stock returns by 3,5 times.

With that in mind, let me answer your questions:

1. None of us are investing on the premise that we are going to hold all the same stocks that we are holding now for 14 years.

I know, but I found no better way to perform the calculation. If I took a shorter time span for my imagined AMZN (with 45% growth and 77% margins) it would not return any meaningful results - there was the 2008/9 crash etc. The long time span removed any seasonal noise.

2. 40% gains compounded for 14 years would give you 111 TIMES what you started with.
45% gains compounded for 14 years would give you 182 TIMES what you started with.

That’s 40% top line gains for the first year. AMZN didn’t keep on growing that fast for the full 14 years. The same will happen for our current companies. There’s no way to know whether they keep growing faster for longer than AMZN. Again, I couldn’t find a better reference point to do this, future is just uncertain.

3. You are comparing apples and oranges. You are comparing ACTUAL 40% gains for Amazon and GUIDED 45% for our current companies.

If Amazon made 40% it probably guided to 30% so you should be comparing 30% to 45%

Yes, that is a valid point. You could bump my estimated return by another 30% in total to account for this, or some 1% on a per year basis.

On the other hand I’m also comparing the past that has already happened with uncertain future and I’m not discounting that future uncertainty.

6. First of all you are saying price to book for amazon and P/S for the present companies, which I don’t understand.

Yeah, that’s a mistake. All numbers are actualy Price to Sales despite me mentioning price to book.

7. If you meant P/S of 45 for Amazon in 2006, why in the world would ANYONE pay a P/S of 45 for a company growing at 40% with 22% GM??? Certainly none of us would. So you are setting up a straw man to knock down.

Yes, that’s why I adjusted for gross margins - I would expect 3,5 times the price for 3,5 times the margins and that’s exactly how I multiplied the expected returns at the end.

Hope that makes it clearer. It’s all rough calculation, and I might as well be way off, but I don’t see a better way. Perhaps somebody could recalculate that with a different company in mind as another user suggested above.

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For comparison, let’s take AMZN 14 years ago, when it was a $15B company: If you bought AMZN at price to book ratio of 45 back in 2006, you’d be paying around $1200.

AMZN at “price to book ratio” but the thread is about “price to sales.” Is this a typo?

Have you considered that AWS was “relaunched” 14 years ago?

Amazon Web Services was officially re-launched on March 14, 2006, combining the three initial service offerings of Amazon S3 cloud storage, SQS, and EC2.

https://en.wikipedia.org/wiki/Amazon_Web_Services#History

Have you considered that 2006 was before the government learned to print massive amounts of emergency money in 2008 that kicked off the 2009 bull market and is doing so now?

Have you considered how AWS kicked cloud computing into high gear just as covid-19 is causing a paradigm shift in how humans behave?

Have you considered where the Saul stocks are on their respective “S” curves?

Have you considered that because Saul stocks are growing faster than Amazon, the time to sell might come sooner, the holding time might be shorter but it’s going to be a hell of a ride? Why must the holding period be 14 years?

Expensive stocks are usually expensive for a good reason. Our job as investors is to determine if the price is right on a case by case basis.

Denny Schlesinger

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Have you considered that AWS was “relaunched” 14 years ago?

Amazon Web Services was officially re-launched on March 14, 2006, combining the three initial service offerings of Amazon S3 cloud storage, SQS, and EC2.

https://en.wikipedia.org/wiki/Amazon_Web_Services#History

Have you considered how AWS kicked cloud computing into high gear just as covid-19 is causing a paradigm shift in how humans behave?

Have you considered where the Saul stocks are on their respective “S” curves?

Hi Denny,

Yes, I have considered those things. In fact that’s why I chose AMZN as my reference point. It was approximately the right market cap, growing as well as a company of that size could grow back in 2006 and it had a stellar run tapping into new technologies.

Have you considered that 2006 was before the government learned to print massive amounts of emergency money in 2008 that kicked off the 2009 bull market and is doing so now?

Yes. It means AMZNs stock price is boosted now compared to what it was in 2006 and shows higher returns than it would have in the 2006 fiscal environment. In other words those returns are positively adjusted for changes in fiscal policy.

Have you considered that because Saul stocks are growing faster than Amazon, the time to sell might come sooner, the holding time might be shorter but it’s going to be a hell of a ride? Why must the holding period be 14 years?

Yes, I have considered that. First, adjusting for growth was the first thing I did. With regards to time period, the problem is that the data would be no good if I took a shorter period. If I looked at AMZN returns in 2010, it would have been tainted by the great recession. If I took AMZNs value in 2012 as the starting point, it was too big of a company to be comparable to our current companies. Taking a long view removes all of this noise.

Expensive stocks are usually expensive for a good reason. Our job as investors is to determine if the price is right on a case by case basis.

And I’m trying to build such a case based on past information. It’s rough and imprecise because it’s a tough comparison but I still wanted to know what balllpark my portfolio is in and I figured I’d share my analysis.

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I’m not sure why you chose amazon, given it’s a different sector altogether. Something like CRM or ADBE would make more sense but even then I’m not sure there is utility in backtesting like this. The world generally and Saas specifically is wildly different now than 10+ years ago and I’m not sure how in any predictable manner, data from a different company and era can be used to project the performance of stocks in industries that didn’t even exist then.

I like the concept of aggregating valuation for the portfolio and perhaps monitoring that against itself going forward and even looking back at the portfolio itself and seeing how the metrics you stated have shifted for the positions recently.

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stenlis -

I admire the effort and detail you’re providing. However, I’ve ended up with a different perspective on this issue. The difficulty in this conversation is it’s another attempt to reduce SaaS valuations to a formula that makes historical comparisons. If there was a way to do that, someone on this board would have figured it out by now.

The longer I’m in the market, the more I realize it gives us patterns about certain companies or market segments. In this case, recurring revenues and high gross margins are giving SaaS stocks very high valuations. We’ve experienced quite a few SaaS multiple contractions only to see them expand again while prices set new ATH’s. I’ll gladly take higher lows and higher highs as I ride out the volatility. These companies are continuously valued somewhere between expensive and nosebleed. While no one wants to or should pay nosebleed prices, it’s hard to see how you’ll ever actually own or add to any of them if you’re not willing to cross the expensive line. Unfortunately, that’s the hard truth for these names. Otherwise, you might end up like this guy who’s STILL waiting for that perfect SHOP pullback several hundred percent later (https://seekingalpha.com/article/4246043-shopify-is-great-gr…). [Hat tip to Tinker for the article. It’s always stuck in my head.]

Don’t get me wrong. I’ve got no intention of making a this-time-is-different-so-just-ignore-valuation argument. I’m simply saying we need to play the hand we’re dealt. Most people here seem to be playing it very well, yourself included if you own many of these names.

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And I’m trying to build such a case based on past information. It’s rough and imprecise because it’s a tough comparison but I still wanted to know what balllpark my portfolio is in and I figured I’d share my analysis.

Maybe that is the issue? Building a case on past information? I am thinking of the famous (to me, at least) Zen phrase: “In the beginner’s mind there are many possibilities, but in the expert’s there are few.” What this means is that if a person looks at something with fresh eyes, unencumbered by education, training, emotion, expectation or peer pressure, they might see what the expert cannot because the expert has a reputation, based on past information, that they need to defend. It can be hard to see beyond that or admit that maybe the past has less relevance. I came across this board with just a few years of investing experience so I don’t have a long history or strong attachment as to how things are supposed to be, or what metrics or valuations stocks are supposed to have, or how it’s supposed to go. Saul’s approach immediately struck me as very Zen, as in focused on what is happening right now, paying close attention and being keen and clear eyed, without attachment…which makes it easier to pivot when circumstances or the data changes. It’s what makes this nimble approach so exciting and fresh…and confounding to many. Thanks to this board, the returns on my portfolio, although not highly concentrated, have left the ballpark.

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For comparison, let’s take AMZN 14 years ago, when it was a $15B company: If you bought AMZN at price to book ratio of 45 back in 2006, you’d be paying around $1200. If you did that, you could sell it for double today, netting you 3,5% yearly gain on your investment. That’s not very encouraging, but maybe it’s not quite fair to compare AMZN with Saul’s portfolio - let’s look at how the companies differ in growth and margins

Where did you find AMZN for $1200 in 2006.
NOT TRUE.
It was about $30-$40 back then.

AMZN just reached $1000 a couple of years ago.

Mike

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