Even though I have been on this board for a short time, I have seen this question about evaluation formulas come up many times. I completely agree with Saul that it is more of an art than financial science. We know billion dollar hedge funds hire PhD data scientists to dig into the financial numbers and evaluations, and also use machine learning algorithms to play the market. They would have nailed it down by now if it was so easy to come up with an accurate evaluation formula. By the way, the majority of the hedge funds with all these resources still can’t even beat the S&P 500.
It is not that easy! If EV/S ratio cannot catch the evaluation correctly for a company then it is better to ignore it instead of using it in the formula where its error can have a negative exponential impact.
Some factors are hard to put in the evaluation formula. Personal experience I can share is of the Netflix, which I bought in 2011 and a few months later it went down by 80% as it was focusing on moving to internet streaming (just like present companies are moving to the cloud) and lost dvd subscribers. I stuck with it for the long term as it was going global, providing access to global content and had no streaming competition. None of the evaluation numbers could have captured their strategy, management execution and risk taking. I did sell Netflix last year (with ~1500% return) after I started following this board and got a better understanding of SaaS companies. Also it lost its moat with new competitors. Similar story goes with Jeff Bezos Amzn, the management’s day one startup company attitude and taking many moon shots - one of them AWS is a big success. How can we capture these in the evaluation formula? These kinds of companies who create new markets are unique.
Sometimes I feel the quarterly numbers we ?see are historical numbers of the past quarter and the quarterly outlook is also based on the next half a quarter already in the past. Market values the company based on the future. Yes, quarterly numbers and outlook carry a lot of weight in our evaluation but we don’t wanna go nit-picky, as in real life we know every project doesn’t execute in perfection. As long as there is no major deviation in numbers, strategy, management execution, TAM and moats, sticking long term with the company is a good evaluation formula. Our boards NET and SNOW stock picks in my opinion are similar kinds of companies, creating new TAM, management execution and risk taking by putting out new products at higher frequency and continuing with stable long term growth (with little up and down waves). Hard to put an evaluation formula to capture all these factors.
Best,
-Vin