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URL:  https://boards.fool.com/joel-could-you-also-explain-your-thought-process-33149965.aspx

Subject:  Re: P/S and Expected Future Returns Date:  8/15/2018  4:52 PM
Author:  volfan84 Number:  100140 of 118187

Joel,

Could you also explain your thought process in dividing by FCF versus Revenue/Earnings?

I think I'm trying to get to the same you've already done but piecing it together.

Mark


Basically, cash flows are what a company needs to survive and thrive, even moreso than GAAP earnings in some ways. Run out of cash, no way to pay the bills, then possible defaults.

Ideally, a mature company would have great earnings and cash flows and a young, growing company would have a clear path to positive earnings and cash flows (if expanding to "take over the world" like Amazon, needing positive earnings might become less important if the revenue growth rate basically exceeds 30% for a full 20-year period). Only looking at earnings or only looking at cash flows might not give a full story. A company could have much better cash flows than earnings if they have a high amount of stock-based compensation or if they are able to improve their working capital position (accounts receivable and payable).

Consistent and growing earnings and cash flows, with revenue still growing is what you'd ideally like to see with a company. Deferring striving for earnings during expansion mode can make a lot of sense for companies that are still growing their customer base (and thus revenues) at a rapid rate.

In a way perception of TTD is almost skewed negatively by a few folks simply because they've already managed to be profitable (GAAP and non-GAAP basis), but they're also still in essentially "hyper-growth" mode with the past 2 quarters having been at 61% and 54% y-o-y revenue growth if the numbers I'm recalling off the top of my head are correct. The fact that they've already shown they can turn a profit is something that myself and DreamerDad alternately view as a positive.

There may be room for some calculus and throwing a derivative into an equation (or group of equations) to incorporate acceleration or deceleration of revenue growth into an improved valuation metric. I have yet to tack that on and "integrate" it into my EV/CF methodology, but perhaps you'll figure out a decent easy way, since you're a NASA guy :)

-volfan84
I followed up the OP here with a few spreadsheets projecting future hypothetical EV/CF ratios. Here are links to a few of those threads:

PSTG:
http://boards.fool.com/pstg-future-evfcf-projections-3300352...

NVDA:
http://boards.fool.com/self-assignment-nvda-evfcf-projection...
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