Valuations coming unhinged

Investment Analysis Clubs Saul’s Investing Discussions
21

Perhaps because AYX is profitable, it’s valuation is shifting to be based on P/E instead of P/S. On a P/E basis it is around 200x. That means it takes 200 years of earnings to generate its market cap. Pretty highly valued. Growth should resolve it in time.

22

That means it takes 200 years of earnings to generate its market cap.
Does it?

As I understand it PE ratio is based on TTM earnings, not forward earnings. Assuming the company was to earn exactly what it earned last year, then it would take 200 years for earnings to reach a 1:1 ratio with price of the stock. But we know these companies are growing at a rapid clip. AYX, in this case, is growing sales by over 50%, and their EPS growth this year is over 235%.

I know it’s a sort of play on words, but as we saw this week, salesforce just gobbled up tableau for nearly $16B. These are bold times.

Invest wisely my friends

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23

As I understand it PE ratio is based on TTM earnings, not forward earnings. Assuming the company was to earn exactly what it earned last year, then it would take 200 years for earnings to reach a 1:1 ratio with price of the stock. But we know these companies are growing at a rapid clip. AYX, in this case, is growing sales by over 50%, and their EPS growth this year is over 235%.

I know it’s a sort of play on words, but as we saw this week, salesforce just gobbled up tableau for nearly $16B. These are bold times.

There are two types of P/E: trailing and forward. The former is based on previous periods of earnings per share, while a leading or forward P/E ratioForward P/E RatioThe Forward P/E ratio divides the current share price by the estimated future (“forward”) earnings per share (EPS).

There are actually other types, but these are the two most popular ones.

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24

That means it takes 200 years of earnings to generate its market cap.
Does it?

“200 years to get your capital back” is a way to measure bonds which have a constant interest coupon. Back in the day of Graham and Dodd things moved slow enough that the method could be applied to stocks without too much error. When you have revenue and earnings growing on steroids, it no longer works. Pull out your spreadsheet and ask it how long it takes with EPS growing at 235%…


 **eps**
 **growth**
 **235%**
**year  price       eps   p/e**
   1    100      0.50  200.00
   2    100      1.18   85.11
 **3    100      2.76   36.22**
   4    100      6.49   15.41
   5    100     15.25    6.56
   6    100     35.84    2.79
   7    100     84.21    1.19
   8    100    197.90    0.51
   9    100    465.06    0.22
  10    100  1,092.90    0.09

In just two years the p/e becomes a most reasonable 36!

Denny Schlesinger

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