As a growth investor our risk is not market risk per se (unless a real and true bubble) but business risk.
As business risk, who cares about backwards price to sales or such. I don’t care about that figure anymore than I care about last year’s Super Bowl this year. What counts it getting to this year’s Super Bowl.
There is one thing certain in life (as long as you survive) is that one year from now today will be one year in hindsight and two years ahead will only be one year in foresight.
Take Zscaler (again, I am not saying Zscaler over Alteryx or Datadog or any such thing, just using it as an example as I know the exact numbers off the top of my head), it presently has an enterprise value from Yahoo! of $5.45 billion.
Its guidance is $405 million for the current year. If its beats that by 11% it will be $450 million (basically 50% growth, $405 million is 32.7% growth. Thus it does not take much to take disappointing guidance and turn it into spectacular results. Of course growth could also be less (like happened with Nutanix and Nvidia and Talent and New Relic, etc. and thus disastrous). Last year guidance was exactly (plus or minus a point or two) this year’s guidance and Zscaler beat by 17-18%. Will it beat by 11% this year? Who knows, could just as easy miss by 11%. I am investing because I do not think Zscaler will miss by 11% and then Zscaler will likely beat by 11% when all is said and done.
If Zscaler beats by 11%, and revenue ends up at $450 million for the year (vs. $405 million guidance now) the enterprise value to revenue multiple will be 12x. At this time next year Zs’s trailing multiple will be 12x. What will its forward multiple be? 40% growth is not out of the question at all (not conservative but hardly pie in the sky). Forward revenue would then be 1 year from now $430 million.
That puts 1 year forward enterprise value to revenue of 8.65x. AT WHAT POINT DOES THE MARKET THINK DANG, 8.65 TRAILING MULTIPLE WITH THE NEXT YEAR FORWARD, 35% growth (again, hardly pie in the sky) of $850 million or a multiple of 6.41x.
Point being, if you are so concerned about multiples as described in that Weiss report, you have really missed ALL of the relevant facts for a growth investor.
It happens (I cited some above - and Nvidia is recovering, Nutanix, who knows, might as well) so there is risk, always risk. But using the above numbers that I don’t think anyone thinks are pie in the sky or overly aggressive. 1 year from now Zscaler is sitting probably below is cash printing ability if it was a mature company. 2 years from now it is well below that. 1 year from now its 8.65x multiple is 1/2 the buyout multiple of MULE. Materially less than the buyout premium for Tableau.
With all the panic, churn, world is ending, where is the bottom, etc. What we are missing is the risk/reward. All that has to happen is the company you are investing in performs - period. Everything else will take care of itself.
Sure, if Zscaler ends up a great idea that ends up New Relicing, you move on. Move on well before we get to the one year or two year period. But if, as simply an example, Zscaler business keeps on churning on…everything will take care of itself in due course.
That is the value of and promise of category dominant, long-term hyper-growth, disruptive companies. It is about the business performance and everything will take care of itself (absent the usual blah blah black swans, etc.)
Tinker