Given the vicious sell off we have seen over the last few months, I thought it would be interesting to compare valuations today for a group of high growth stocks versus the last few years. Over the long run, fundamentals are what drive stock prices but in the short term, stock prices are primarily driven by changes in the multiples they are given. With stock prices dropping about 50% from ATH’s for many growth stocks, their multiples have compressed a great deal (not to mention many are also reporting terrific numbers also driving down the multiples). I wanted to look at the valuations from the beginning of 2020, the peaks from before the COVID crash (February/March 2020), the highest multiple the stocks have been given and the multiple today. Without further ado, here are the figures. Please note all multiples are listed as TTM EV/S. I prefer to use TTM as this gives me real numbers to pull from versus forecast that are used for FWD multiples. Also, the numbers may be off by a few percent as I was pulling the data via graphs from Koyfin and could not be 100% precise. They are listed from smallest to largest (market cap listed next to ticker).
ROKU - $20.2B - $3,580 TTM Rev
Start of 2020 – 16.0
Pre covid peak – 21.5 on 9/6/19
Peak – 38.3 on 2/16/21
Today – 7.6
NET - $28.1B - $589 TTM Rev
Start of 2020 – 17.8
Pre covid peak – 27.2 on 9/23/19
Peak – 117.3 on 11/18/21
Today – 50.0
TTD - $30.6B - $1,121 TTM Rev
Start of 2020 – 20.0
Pre covid peak – 23.5 on 7/26/19
Peak – 62.1 on 12/22/20
Today – 27.6
ZS - $32.6B - $761 TTM Rev
Start of 2020 – 17.2
Pre covid peak – 39.3 on 7/26/19
Peak – 75.2 on 11/19/21
Today – 44.0
CRWD - $37.0B - $1,285 TTM Rev
Start of 2020 – 22.6
Pre covid peak – 67.9 on 8/19/19
Peak – 69.1 on 2/16/21
Today – 29.0
DDOG - $40.5B - $880 TTM Rev
Start of 2020 – 33.5
Pre covid peak – 45.1 on 2/12/20
Peak – 72.2 on 10/12/20
Today – 47.5
SE - $79.3B - $8,300 TTM Rev
Start of 2020 – 10.1
Pre covid peak – 14.5 on 5/16/19
Peak – 39.5 on 2/18/21
Today – 9.2
SHOP - $108.2B - $4,210 TTM Rev
Start of 2020 – 31.2
Pre covid peak – 33.7 on 8/27/19
Peak – 71.5 on 2/16/21
Today – 26.5
A few things stick out to me while looking through the numbers. For the majority of the stocks, we have seen most of them re-rate back down towards a similar multiple they were given a couple years back prior to the COVID outbreak, or at least near their pre-covid peak. Cloudflare and Zscaler are outliers here but I think we can all agree they were extremely undervalued a couple years ago based off what we know today.
It begs the question, are the multiples we are seeing today more “realistic” or “correct” valuations for high growth stocks? Did valuations soar over the last couple years to unrealistic heights and now we are returning to earth? As I look at the valuations today for many of my companies, they are not the same kind of screaming bargains even after a 50% haircut like they were during the March 2020 low. Back then, not a single stock listed above had a TTM EV/S multiple above 25. This is what helped many of us achieve 100-200%+ returns in 2020. The market tends to overreact in both directions and I think most of us can agree it swung too low back in March 2020 and likely swung far too high to be giving multiples like 117x sales for Cloudflare or 38x sales for Roku. But have we swung too far down again in January 2022?
I am not sure the answer, but my best guess would be yes. This is because I believe most the businesses we discuss and own here should not be valued as they were in January 2020. Technology has been pulled forward exponentially due to the pandemic so it would make sense that these companies are valued differently today versus a few years ago. The world has changed and our companies have not only withstood the test but many have thrived. I am reminded of the quote from Satya Nadella, the CEO of Microsoft back in April 2020, “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security…” If two years was pulled forward in two months, how much do you think was gained over the last 20 months?
In total, this has been a very ugly start to the year but I think this should set us up well for a strong bounce back later this year. That doesn’t mean we will get back to the peak valuations listed above, but I do think there is room again for the multiples to expand from this point on. Our companies are thriving and adding new customers/modules/partnerships every day. I am personally pulling every penny I can find from the couch to buy shares of these great companies at these prices. I fully expect to be quite pleased with these purchases a year from today.
Lastly, if this post is deemed as OT, please feel free to delete.
Rex