No. of Recommendations: 3
Certainly we are going to see the greatest returns via multiple expansion...the Big Jump if you will. It happens during FUD events, see Twilio, or before the market wakes up to a stock and/or the business picks up immensely, see Nvidia.

Today, the market has awoken to the SaaS model and we see many high valuations right off the bat if the company has the metrics we want to see, see ZS and ESTC. I posit the only thing different this time is the SaaS model itself. Yes, it has been around a while (CRM), but the model is being used far more prominently today with tons of companies to choose from. Because the market sees the SaaS value, it will be harder to find companies with multiple expansion. Yet, we will still see FUD from time to time along with poor performance. However, if the companies are solid, those will present great opportunities. Determining whether to cut bait over opportunity cost or hold and average down is incredibly important.

Opportunity cost is the toughest decision and I believe is the most pertinent to this discussion. Naturally a company that is growing revenues at 50% is going to halve their P/S in a year without any stock movement (ignoring dilution which can be very important). But if the business remains strong, the following year the stock price would likely gain 50% or else the valuation would become absurdly low.

There may be a case for maintaining bets on both sides. First, find the companies that are the absolute strongest even at high valuations and ride the storm for many years. However, it would pay to have some bets where the P/S hasn’t expanded yet and I’m thinking of you, Nutanix.

Yes, I do think some of the highly valued companies talked about on this thread are worth buying at this point. However, I don’t think one should expect the type of returns investor saw in such a short period of time during multiple expansion. Patience is key, unless you think you’ve got a better idea.

A.J.
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