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URL:  https://boards.fool.com/all-these-companies-that-had-huge-ps-ratios-then-34079416.aspx

Subject:  Re: How long do P/S last? Date:  12/7/2018  10:45 PM
Author:  XMFBreakerTinker Number:  106403 of 111484

All these companies that had huge ps ratios then continued higher we’re doing something unique.

I disregard Amazon because of the Internet bubble. However, I went back to review David Gardner's first recommendation for it at a market cap of $850 million or so. Its price to sale was through the roof. People were panicked, and it was growing like nuts.

When I started in the market Amazon was already at $30 billion market cap. Yes, much higher market cap to opportunity than $850 million was, but less expensive (albeit still very expensive).

I am not so concerned with lower market caps. Either Mongo succeeds or it does not. There is no way to know, but we know it is doing something new, something big, something important as it is badly needed, and it is leading the world market in doing so with what seems to be increasing returns and very nice sustainable advantage that appears will grow stronger over time.

If it does this then the current market cap will be like looking at SHOP when it was overvalued with a huge price to sale at $4 billion itself. Or it can "tween" as the no longer used term can be applied to, and before moving into a still fast growing but more mature company at a much higher valuation its business model will start to fall apart. Unable to create earnings leverage, disruption from below, Oracle successfully re-architects postgres and takes over the market, or the CAP that is one of the primary hypotheses for this investment turns out to be untrue.

Whether it is presently selling at 18x trailing or 13x trailing, I do not think will make much difference. Now if it were selling at PSTG or Nutanix or Talend like P/S with all that appears to be going for it, then we would have to think real hard as to what is wrong with it.

I don't think it is much more difficult than that. If you want to use an Excel spreadsheet to statistically pick investments such as the algorithms do, then that is something else. Statistically you may be able to run some sort of regression (I am sure some hedge fund has done it, I once had a Chinese physicist tell me he would create such an algorithm and beat the market (think he is packing groceries presently) and create a market beating portfolio on automatic.

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However, if you are looking one by one on a personal basis as to the best investment opportunities, price to sale does matter to inform if there is a bubble, to inform if the company can grow into and make its present valuation seem like a distant memory in reasonable order, and to determine if there may be something wrong if it is just too cheap (Talend e.g. vs. AYX).

Another great example Talend v. AYX. Why was Talend so less costly by multiple than AYX? I mean, objectively, a year ago, why? Answer, the market picked the chafe from the chaft. It is possible that Talend would have outperformed market expectations and increased its multiple (Nutanix is doing it again) - but I believe a distinct minority of times this will happen. Far more than not the market knows something. I have seen it many times. And every time there is a chorus of people who jump on the bandwagon as this stock is a bargain!

Perhaps at times like that it is better to go cash because if you have to look to lower quality investments just to get a price to sale that you think will produce superior returns then the market as a whole is probably due to a downward correction (as there are upward corrections as well).

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Mongo to me is the sort of thing that Google can buy to gain entry into the enterprise, something Google is trying very very very hard to do. Thus market dominance and customer numbers and quality increase Mongo's buyout value. If Mongo can also leverage themselves into a cash cow sometime in the future, all the better.

True though, if Google bought them, there goes the TTD neutral vendor thing. But just a possible other example of value creation.

Enough. There is merit in price to sale, but I am not interested in creating an algorithm, but only in knowing if we are in a bubble. to me a bubble is defined as a valuation that is so high that it precludes any extraordinary returns going forward because the valuation eats them all up.

Dreamer has talked about Juniper. I saw Juniper at $50 billion and I went, whoa! So where is the future profit potential? That is its value in 10 years. And you could see that across the board. Ergo, a bubble.

My mistake at the time, being very naive, was to think the market would only crash in half. Even I figured out it was a bubble. But through that experience it also took my native ability that I appeared to have and hardened it and gave me the experience to look also for quality businesses that are sustainable, not just fast growing stocks.

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As such, no, I do not like Teladoc. I have given it a chance, and the latest news was the last straw. But yeah, its whole business structure is based upon using other people's money to buy loosely knitted "Uber" like groups of doctors who have (and will never have) a relationship with their patients.

I want telemedicine (and my health coverage is adding that benefit in 2019). But you know what, I also want it from someone who has my chart, my medical history (at a minimum) - please, at least a minimum - and someone who I know is good and competent. Teladoc does not provide this bare minimum. When I want a driver I just want someone sober, competent to drive, and not dangerous to me. Lot lower barrier to competence.

Thus Teladoc can never be the Uber of medicine. Something has to give with Teladoc.

That is the "hardened" me. I hope I am wrong. And this despite the fact that YES TELEMEDICINE IS HERE AND WILL ONLY GET BIGGER! I prefer however, software licensing side of Teladoc so that I can speak to a doctor within my own medical system. That way they have my chart, my history, can consult with my regular doctor if necessary, and I know the doctor is part of an organization responsible to assure competence.

TDOC is presently selling at a bit more that 6x enterprise value to revenue from the median analyst estimate for 2019. Is TDOC a bargain? Is the market just getting it wrong? Or, perhaps, are there real issues like I address above? I certainly cannot invest in TDOC as part of a more concentrated portfolio (not even if I held 10 stocks). Sure if I owned 15 or 20 I could, but the low price to sale appears to also indicate the market may sense some real issues here as well.

Hey, that is the way I see it.

TDOC at 6x is far riskier than MDB at 12x.

Tinker
Leave it to me to bloviate on what was to be a short post. Thus I separated sections.
Goodnight y'all from the frigid south. I hate winter in the south. I just need to move more south to correct for my initial misjudgments that winter in the south is as divine as 69...err, not sure what 69 references, but hear it used all the time. Peace.
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