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Subject:  Re: How long do P/S last? Date:  12/7/2018  3:33 PM
Author:  12x Number:  106379 of 114653

Maybe you should consider using different metrics other than P/S.

Let’s assume MDB could be generating $2 billion in revenue in 10 years. If we put a P/S ratio of 8 on it that’s a 16 billion company, roughly 3-4x current prices. That’s 13% annualized. While it’s on the low end of what we’re shooting for it is above historical index returns at a time overall valuations historically are followed by smaller gains. Besides that I just used numbers I totally randomly cane up with. had 748 million in revenue year ended January 2008. 20x sales would have made it a $15 billion market cap. Had you bought at 20x revenue and held to today’s roughly 8x sales you would have enjoyed 21% annualized. Instead crm traded much lower than 20x sales back then and was therefore severely undervalued. If it continues to grow as it had been it is still undervalued.

Take a biotech with no products on the market but potential blockbusters in the pipeline. Their only revenue is royalties from partners hitting milestones in development. We do not value biotechs at p/s but instead a discounted formula based on future peak sales. Why would we not value Saas stocks or MDB in the same manner? Why does it matter if they’re at a current run rate of 100m or 260m revenues and with their corresponding p/s ratios, when, 10 years from now they will be registering 3 billion in revenue?

To me, market cap relative to tam, and what direction tam is going, is a better measure of valuation. Quite frankly I don’t know the tam of nosql databases. For all I know 10 years from now it could be bigger than MySQL. Or it could be lower.

I don’t know. All I can tell you is market cap relative to market seems more relevant. There are too many unknown variables to put a proper valuation on these companies. This is not like valuing Clorox co. Too many unknown variables compared to a mature stable market like bleach.

I do acknowledge higher valuations created volatility and harder falls when things slow down, which is why i do my best to try and stay in growth stocks that have odds in their favor for continued growth. Not flash in the pans.

I subscribe to the Philip Fisher methodology, which is basically don’t worry about valuations. Don’t even sell if it’s overvalued when you believe it will be much bigger in the future. Just try to buy when they stumble and are temporarily out of favor in the market. I have followed stocks For years waiting for them to become cheap. I followed MA from it’s IPO waiting for it to be cheap. Even during the 2008 bear many of the truly great companies never became “cheap.”

I’ve been reading articles where people keep bringing up p/s ratios and they start recommending also-rans because they have lower valuations.
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