Obviously I’m not sure what’s causing the hype on any of these. But those PS ratios (and even ZS’s P/B ratio) just seem crazy. There are so many years of hyper-growth already baked in. It’s a little tough to even take these valuations seriously. “Priced for perfection” is a huge understatement.
Here are two more I’ll call “not so honorable mentions” – these are clearly not as crazy as the above group, but with revenue seeming to slow for OKTA, and clearly slowing for SHOP, I just don’t get them at all.
When you graph these valuations versus a gross profit growth rate you see a linear correlation that is more informative of relative valuation in the market.
Valuations on some seem nuts.
Then again, earnings power ismuch greater.
They dont have to stop Fortune 500 rankings, but Fortune 500 in Profit would be moreindicative of how valuable the companies should be.
Amerisourcebergen is top 10 or so Fortune 500 in revenue. They make very little profit.
So i think projectes future earnings based on a revenue base 4-5 years out and based on X% gross margin…yada yada.
Still just projection.
Google and FB print cash at much lower revenues than “larger” companies ranked higher on Fortune 500.
ZM is out of control imo…i just dont see the TAM. Video capabilities should just be table stakes eventually…businesses used to not have websites, as an example…now they all do.
How much growth is baked in is directly related to how fast gross profit is increasing and how large the forward TAM is.
I think what you meant is:
How much growth is baked in is directly related to how fast gross profit will increase and how large the forward TAM will be.
That is decidedly harder to factor into any equations, because the fewer is unknowable. But of course I’m taking the future into consideration, and yet I still think these stocks are hugely overvalued.
JAFbrblev, I’ve found this chart very helpful since you first shared it. Do you have plans to update it as new data is released?
I have two plans associated with this chart
Update this over the weekend; I was awaiting the clearing of earnings
Investigate the use of Google Sheets / Google Finance to automate this information
I’d welcome any well known free tools (please send to me offline by checking “Email this Reply to the Author” and unchecking “Post this Reply to the Boards”) that I could automate as a service.
That is decidedly harder to factor into any equations, because the fewer is unknowable. But of course I’m taking the future into consideration, and yet I still think these stocks are hugely overvalued.
Bear
I would agree that valuations are continuing to creep up - however - what is interesting to note is the market reaction to deceleration, or perceived deceleration from guidance. In some instances (SQ) the deceleration and compression of valuation persists… and in other cases (TTD, TWLO) the deceleration appears to be momentary.
BTW - AYX continues to look like the prettiest stock at the ball in this new world.
Many of the stocks discussed here are just “enterprise software” companies with a different pricing and payment model. I do not think that justifies sky high valuations that they are starting to gather across the board. Of course there will be some winners and losers in here but it just seems there’s starting to become a lot of unwarranted hype around SaaS as if it’s a repeat of the creation of the internet when it’s not. It’s a handful of enterprise software companies growing revenue at 50% off a small base that run off the cloud and have an recurring revenue payment model instead of fixed license with various expirations.
Don’t get me wrong, I’m in the same boat with my investments, but feel more like it’s hype every passing day they go up.
There is no way I’d buy Pager Duty at 35x sales for example. Just not going to do it.
I don’t want to call these stocks bubbles unto themselves, but perhaps there are less accurate things one could call them.
ZS has been “overvalued” since its IPO…coming out with P/S in the 23 range for most of last year. Only since Jan 2019 has its P/S really skyrocketed.
SHOP has been in a similar range at many times in 2018 (around 22)…now 25.
OKTA, like ZS has had a massive increase in P/S since jan 2019.
This has been a momentum driven tech market…nearly all stocks with revenue growth rate >50% have experienced incredible stock gains…irrespective of the financial analysis/logic in those moves.
I believe we have commented on this numerous times and have some pretty solid data on what happens next statistically speaking.
But for sure, those ignoring the valuations and simply holding high revenue growth have done very well to date.
I’ve never been all-out high growth, but I’ve been above 70%, as high as 85% in the last few months. However I’ve been concerned about valuation, and about certain macro trends that I think cannot be over-looked, even if taboo here on this board. Last week or so I’ve trimmed myself down to 60% high growth, raising my cash position and moving some funds into REITs.
Partly this is me being concerned about where the markets are going. Partly it’s the allocations getting above my own personal comfort level. At some point you have to sleep well at night even if it means just beating the S&P by 50% rather than clobbering and doubling its gains.
Bear… no need to tell you, but low sell high and yet some go higher and keep going!!! For some of us who brought these babies from the start, what a lovely dilemma. Complain when they don’t move, complain when they go down and complain when they move to Mars…:-))))
I believe we have commented on this numerous times and have some pretty solid data on what happens next statistically speaking.
Yep, I agree, we do know, it’s an almost constant for any stock, especially our high volatility stocks, the market overshoots on the high end, corrects, and overshoots on the low end…rinse, repeat. The time frames, magnitudes, and reasons for the swings all vary from stock to stock (some are valid, some are FUD), but since none of us can predict how long the overreaction will last, seems best to me (if you can stomach it) to hold on to the good stocks and add to them on the dips. I have no issue trimming if allocation gets too high, and then you have cash to add to it or others on the unwarranted drops.
But sooner or later this party will come to an end, or at least a slowing, for a while, but long term, the great companies will outperform.
But sooner or later this party will come to an end, or at least a slowing, for a while, but long term, the great companies will outperform.
I invest for the long haul (i.e. until my investment thesis is FULLY realized or for some reason goes busto). I own the following companies in my retirement portfolio because I believe they are and will continue to be great businesses (with tremendous leaders) over the period of 10 years or more. I have no plans to sell my positions in them based on market swings. I do and will continue to trim positions at what I believe are moments of market greed and buy at moments when the market is fearful. Investing in great companies is not a binary decision–you own or you don’t own–instead one should endevour to understand the company well enough to know when shares are being offered at a discount (buy some!) or are flying too close to the sun (sell some!).
I can not see the party ending for these COMPANIES for many years into the future; however, I sure as h*ll hope Mr. Market gets spooked and offers a good price on SHARES many times in the years to come!
I only own shares in 3 other companies in my retirement portfolio. These are value investments. One of the companies (CELG) is now in process of being acquired, so that worked out just right. Two are companies I very recently acquired, these are special situations and what I consider to be offered at a deep value (these three are not for discussion on this board, if interested you can see them listed in my profile). One of the reasons I purchased these 2 deep value stocks is I am finding less opportunity in the hyper-growth/SaaS space (as indicated by the valuations discussed by Bear at the top of this thread.)
For these value stocks the key is to show up to the party early, before other guests arrive, and hope it gets hopping–loud and hard–very soon!
I have one additional SaaS company that I will likely pull the trigger on buying shares very soon and one, Pager Duty, that I really like but can not justify buying based on valuation.
Couple of other thoughts: 1. a problem generally has more than one solution; 2. Ain’t it great to be free.
Best, Swift…
Looong all the stocks mentioned in this post…
There are plenty of reasons that all of the above occurred, I am just sharing that depending on the moment in time and the ebb and flow of the market. It further says to me that technical analysis, while good for bracketing reality, is not a surgical tool for timing, etc., especially in emerging parts of the market - which I think the broad movement to cloud based IT, enterprise software, leveraging massive amounts of information to drive intelligence, and moving from purchasing to a subscription, all qualifies as the fundamental business change we are tackling.
As noted on Friday, over the weekend I updated a relative graphic of Gross Profit Margin Growth vs P/S as well as a 1 year in advance look.
Gross Profit Margin Growth vs P/S https://imgur.com/a/4BXjlan
Note: For TWLO I added in SEND revenues to obtain a new TWLOSEND growth rate, which diluted the TWLO only growth rate (you can see in history)
1 Year Ahead Gross Profit Margin Growth vs P/S https://imgur.com/a/n6mvjDN To calculate a year forward, I look at the growth rate over the past year. If it has decelerated, I assume that deceleration will continue at a rate that is 50% of the past year. If it has accelerated, I take the average of the past two quarters and hold flat for the year. I have two exceptions to this rule - APPN and NTNX - where I focus only the subscription revenues and margins in my calculations of the company’s value and forward value. For NTNX, I severely degraded the growth moving forward given their latest guidance.
While I suspect that considering valuations and gross profit margin growth may be considered OT for our companies, I personally find great value in having a standard set of metrics to discuss hyper growth companies and their relative valuations (i.e., quantifying WHY I am investing in the companies).
For a more comprehensive list, one should read the sidebar of how Saul screen’s for companies.
I find the above charts useful when thinking about when to buy - however - NOT useful in evaluating when to sell.
