Interesting to see all the angst over the ZM valuation - I am curious how the line gets crossed into “overvalued”. Those of us that thought 10x revenue was crazy were proven wrong*; why is 50x revenue the new threshold for “overvalued”?
*in the recent short term at least
tecmo
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In this case I’m looking at it in terms of opportunity costs. If something is growing at 100% and valued at 50x, is that better than something growing at 65% and valued at 30x? Since the holding periods of the stocks we have tend to be 2 years or less (S curve), the longer you’re banking on the continued growth, the riskier it is
Going back to when 10x was considered high, you were comparing those companies that were growing 60% to the S&P which grows sales 3-4% per year but valued at 1.5x, well the valuations will equalize in 4 years, and software has much higher margins and almost no marginal cost compared to your average S&P component so it deserves a higher multiple because it’s going to throw off more cash.
It’s not going deep enough to just compare the initial valuation, growth, addressable market, competition all factors in
Nothing is “over valued” while it’s going up. When it crashes, it “was” over valued. Valuation of growth stocks, specially asset light stocks like SaaS, has nothing to do with traditional “Security Analysis” by Graham and Dodd. Peter Lynch did write about a relationship between growth and the P/E ratio but many early stage fast growers have negative P/Es for good reason. I like to think in terms of the value the company creates for its clients, “mission-critical” being more valuable than “nice-to-have.” “High switching costs” is more valuable than “commodities.” Saul sure has a knack for it!
Denny Schlesinger
Nothing is “over valued” while it’s going up. When it crashes, it “was” over valued.
The term “over valued” is completely subjective. Each investor may determine their own assessment as to whether an asset is under valued, over valued, or fairly valued. The term “valuation” is simply the current market price (assuming we’re talking about a company that is publicly traded and assuming that there is sufficient liquidity in the stock of the company to reflect the votes of many investors).
If a stock is going up then it can be over valued or under valued in the mind of each individual investor. Now, some people don’t buy shares based on their opinion of the valuation; they maybe be trying to make a return on momentum, charts, etc. while they have absolutely no idea about what the company might be worth. These buyers and sellers will influent the price and thus the valuation.
Chris
I don’t want to post unhelpful things, so delete this if you wish. I think valuation matters a lot.
I think valuation matters a lot. I will give 3 reasons.
First, through out history, great companies with high valuations got slaughtered. There was the nifty fifty in 1972. There was the tech. boom, where great companies, like intel, Microsoft, Cisco, and Analog devices got killed.
Also, when stocks are at a high valuation, if you miss earnings by even one penny, the companies gets taken to the wood shed.
Finally, if you look at statistics, the lower the decile in terms of p/e, the higher the returns.
Saul is the outlier, in that he found a way to buy high valued stocks, and do great, but there are not many Saul’s.