No. of Recommendations: 25
The reason you’re hearing “valuation does not matter” is because valuations are the highest since the bubble. But so is revenue growth. This is the first time since 1999 that we have seen companies going public growing revenues at a 50% clip en masse.

OK, good discussion 12X, Tinker, Dreamer, Ethan, Volfan, AJ, Tex, Denny, Kevin, Money, Torque, Tree, Ben......its why I love the crowd sourcing of ideas that the FOOL's platform provides for us.

At least here at the NPI, I believe we are savvy enough to know that valuations do matter. There simply must be some extreme of valuation wherein, an investment makes no sense or at least lesser sense compared to alternative investment opportunities.

There can be an "illusion" that valuations don't matter during a "momentum" phase of market appreciation (like this past year), when there is too much money chasing too few investment options (perhaps what we have seen in the early SaaS craze) or when the money supply has been massively expanded (such as what had happened from 2008 forward through FED actions).

These momentum driven markets can "allow" valuations to run far and hard as money indiscriminately chases opportunities despite the irrational valuations.

Please allow me to add some color and do a little walk down memory lane:

https://www.fool.com/how-to-invest/2014/06/28/beware-of-high...

When investors buy stocks with high P/S ratios, those stocks need to grow revenue at least 30%-40% on a yearly basis for many years into the future. This is because investors are paying a big premium today for growth that is expected to happen in the future. But, with any deviation from future growth expectations, the premium paid today may no longer be deserved. As a result, and because an irrationally high P/S ratio cannot be maintained by an increase in revenue growth, the stock is likely to collapse.

This is why the table that Jon posted with % growth rates (and the FEV thread) are so important IMO.....these momentum (expanded valuation multiple) stocks MUST have high revenue growth well into the future to sustain their lofty stock prices.

Look at what happened to CSCO after it reached a P/S 35 in 2000.....an 18 year stock price contraction.....though I haven't gone back to see how its revenue growth contracted, it surely didn't maintain that high P/S for very long....less than year.

Please try to find all the stocks that have held a high P/S for many consecutive years......this is a VERY RARE event when I last looked. I would like to study your examples a bit further so offer all your lists of tech stocks that have held high P/S for 3 or more years.

One of the few I discovered was FB which maintained a P/S of 18-20 for 3 straight years from 2013 to 2015 (currently it is 7).

Let's look at the stock's annual return during these years compared to its P/S:

Year P/S % Stock Gr
2012 11
2013 21 105
2014 18 43
2015 19 34
2016 13 10
2017 14 53
2018 8 -25

You can see from this example (one of the few of sustained high P/S from 2013 to early 2016), that the stock return did dwindle in those years (the initial 105% growth was the multiple expansion which was followed by 43, 34, 10).

But please offer forth your other examples of consistently high P/S year after year so I can look at these annual stock returns in comparison.

Back in April, I posted a segmented portfolio of P/S.....the ONLY stocks with P/S at 20 and higher were SHOP (20) and ZS (21).

Their returns this year have been 33% and 21% respectively......perhaps some parallel with the FB situation.

In contrast, when we look at the real massive gain stocks this past year, they had much lower starting P/S:

MDB was 7...now 20.
TTD was 7...now 14.
TWLO was 6...now 15.

I hope I have convinced everyone that the huge gains made this year on stocks like MDB, TWLO, TTD have been through multiple expansions.....these charts are irrefutable:

https://ycharts.com/companies/MDB/ps_ratio

https://ycharts.com/companies/TTD/ps_ratio

https://ycharts.com/companies/TWLO/ps_ratio

But again the question of the hour is.....now what?? Do you still want to be holding these stocks with P/S of 20 or greater or do you want to add or take a new position??

These are my suggested conclusions (please feel free to refute them WITH DATA):

1) The highest returns will likely NOT come from the highest valued stocks.
2) The highest returns will likely NOT come form the lowest valued stocks.
3) The Highest returns will likely come from that middle tier valued stocks (P/S 6-12).
4) There may still be tax reasons to hold a stock that grew into a high valuation even if the going forward return is NOT likely to exceed other opportunities.
5) It is VERY challenging to identify and hold a stock for 10 years prospectively since one cannot know that such a stock is the next AAPL or MSFT.
6) An investor still has to identify the most promising stocks first, and then apply the above checklist.

If I could also circle back to 12X's suggestion that using the market cap to TAM can be useful. We have done a great deal of TAM assessments on our stocks here at the NPI. As readers here know, it can be very tedious work especially with the wild TAM proclamations thrown around by these companies incessantly....they are inherently unreliable.

So while few would dispute the ideal of comparing market cap to TAM and all its competitors market share (like we did ad nauseum with TNX,VMW, etc. in the past couple years)…..this data is unreliable.....too unreliable IMO to be that useful unless we have some independent confirmation of legitimate TAM outside what the companies are proclaiming.

Sorry for the long wind...will stop for now and offer a high 5 and 2 Tylenol for anyone who read this far :)
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No. of Recommendations: 4

Ticker TTM Rev (m) EV (m) Rev Growth EV/S FEV/S
ANET 2,020 16,978 27% 8.4 6.6
AYX 182 3,646 49% 20.0 13.4
ESTC 212 4,904 60% 23.1 14.5
MDB 216 4,512 66% 20.9 12.6
NEWR 413 4,737 31% 11.5 8.8
NTNX 1,160 7,557 13% 6.5 5.8
NVDA 12,420 90,042 -7% 7.2 7.8
OKTA 362 6,811 53% 18.8 12.3
PSTG 1,180 4,112 32% 3.5 2.6
PVTL 582 4,569 27% 7.9 6.2
SHOP 952 15,727 55% 16.5 10.7
SQ 1405 24,506 59% 17.4 11.0
TLND 190 1,218 38% 6.4 4.6
TTD 419.5 5,776 50% 13.8 9.2
TWLO 561 8,831 68% 15.7 9.4
WIX 558 4,323 37% 7.7 5.7
ZS 214 4,938 43% 23.1 16.1


Ok, I refined and just used the market cap on all for ease of tracking.

Does anyone want to stake the claim that a portfolio of ZS, MDB, ESTC, OKTA and AYX will outperform a another portfolio of similar revenue growth but lower valuation over the next 3 years?
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No. of Recommendations: 9

Ticker TTM Rev (m) EV (m) Rev Growth EV/S FEV/S
ANET 2,020 16,978 27% 8.4 6.6
AYX 182 3,646 49% 20.0 13.4
ESTC 212 4,904 60% 23.1 14.5
MDB 216 4,512 66% 20.9 12.6
NEWR 413 4,737 31% 11.5 8.8
NTNX 1,160 7,557 13% 6.5 5.8
NVDA 12,420 90,042 -7% 7.2 7.8
OKTA 362 6,811 53% 18.8 12.3
PSTG 1,180 4,112 32% 3.5 2.6
PVTL 582 4,569 27% 7.9 6.2
SHOP 952 15,727 55% 16.5 10.7
SQ 1405 24,506 59% 17.4 11.0
TLND 190 1,218 38% 6.4 4.6
TTD 419.5 5,776 50% 13.8 9.2
TWLO 561 8,831 68% 15.7 9.4
WIX 558 4,323 37% 7.7 5.7
ZS 214 4,938 43% 23.1 16.1


Ok, I refined table as of closing yesterday and just used the market cap on all for ease of tracking.

Does anyone want to stake the claim that a portfolio of ZS, MDB, ESTC, OKTA and AYX will outperform another portfolio of similar revenue growth but lower valuation over the next 3 years?

The alternative portfolio would likely be SHOP, SQ, TTD, NTNX (accepting software growth) since these stocks have similar revenue growth but lower valuations and sit in that middle tier.
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Does anyone want to stake the claim that a portfolio of ZS, MDB, ESTC, OKTA and AYX will outperform a another portfolio of similar revenue growth but lower valuation over the next 3 years?

Being that’s a good chunk of my port, I have. The difference is the market has determined(rightly or not) that the higher PS stocks will sustain that growth for a longer period than the lower ones. In the case of the aforementioned stocks I agree. They are the companies I want to be part owner of more than the others. Although I own some of the “lower” ones too. With ZS, MDB, AYX, and some others I have been in for awhile and their outperformance has placed them at the top as much as periodic adds.

Darth
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Does anyone want to stake the claim that a portfolio of ZS, MDB, ESTC, OKTA and AYX will outperform another portfolio of similar revenue growth but lower valuation over the next 3 years?

The alternative portfolio would likely be SHOP, SQ, TTD, NTNX (accepting software growth) since these stocks have similar revenue growth but lower valuations and sit in that middle tier.


I’m probably around 50/50 between those two groups. Maybe slightly more sighted in the latter.
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Look at what happened to CSCO after it reached a P/S 35 in 2000.....an 18 year stock price contraction.....

---

This goes back to my "you won" comment. Cisco was approx $500b mkt cap at peak after crazy run up.

Also...public school napkin math says if stocks are growing 50% y/y, that they could maintain their current stock price for 2 years and P/S would just organically be cut in half over time.

So then it becomes what P/S will market allow/sustain? I do think if you can grow greater than 50% y/y for a few Q's you "earn" that higher P/S, like SHOP did.

Ttd twlo mdb and zs all have potential for 50% type growth or more for at least 2-3 more years, due to TAM. We will see.
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No. of Recommendations: 2
At least here at the NPI, I believe we are savvy enough to know that valuations do matter. There simply must be some extreme of valuation wherein, an investment makes no sense or at least lesser sense compared to alternative investment opportunities.

For me "valuations don't matter" means that valuations calculated by the Graham and Dodd (G&D) methods don't apply because they were working in a relatively steady state market. NPI stocks are almost all "S" curve growth stocks that we aim to own between the bottom and top curves of the "S" During the middle of the "S" curve the standard G&D metrics don't apply, a different set of valuation metrics must be used - I wish I knew what they were.


When investors buy stocks with high P/S ratios, those stocks need to grow revenue at least 30%-40% on a yearly basis for many years into the future.

During the middle of the "S" curve they should! Top and bottom are signaled by market peneration, 15% at the bottom and 85% at the top (roughly). At the bottom you have multiple expansion, at the top, multiple contraction, in the middle 50% drops to drive one crazy!

Denny Schlesinger
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No. of Recommendations: 1
Does anyone want to stake the claim that a portfolio of ZS, MDB, ESTC, OKTA and AYX will outperform a another portfolio of similar revenue growth but lower valuation over the next 3 years?

Atlas at 300% will outperform something growing at 50%. Of two stocks growing at 50%, the lower valuation one should win. Logic 101?

Denny Schlesinger
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I’m probably around 50/50 between those two groups. Maybe slightly more sighted in the latter.

Me too.
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No. of Recommendations: 5
They all look reasonably priced to me...

But unfortunately the numbers. are. not all equal. Dang ipad keyboard......

Take. Zuo. It is more expensive than it. seems because part of their revenue is like Nutanix’s pass through hardware was, worthless. Thus, althoug it seems cheap it is not. Making it probbly the worst sort of thing to get into and why it has underperformed (not to mention touting a book instead of the companies business prowess...but as i said when others appear expensive, and a cheap stock comes along that seems revolutionary, misunderstood by the market, and run by a visionary, groupies start forming a line behind it).

Revenues by Zs are not the same as by most other companies. Why? Higher switching costs, but more than this, after year 1 the revenue stream has very little marginal cost. Compare this to a Nutanix that has to go out and earn its sales every year and pay commissions on it every year, with the market characterized by rabid competitoin and rapid technological obsolescence.

AYX is more similar to Zs in that manner.

The economics are just different. period. Thus no matter how you slice it you are putting an apple on one plate and a banana on another.

Destiny is all...I think is quite fittign in the end. Clearly none are in a bubble, we focus still too much on the past, and it will be the companies with long term business success that will win.

Put it this way, If you own Zs and its growth suddenly slows to 25% as is hypothetical, who would continue to own it? Not me, and further not me at any price. So it is a false choice.

ISRG still has a multiple similar to ABMD believe it or not! Although only growing in the mid-teens! The power of CAP and perceived TAM still despite a $50 billion marketcap.

If you plan to hold any of these stocks as if they are ISRG, and hold the no matter what their growth comes to, then it is a discussion that makes sense. Otherwise not so much.

I get information from the multiple. As we have seen the multiple is completely inverse to the relative performance, at least this year, and at least in the market crash of October. The opposite of what its proponents propose as the true rule that the world will follow.

Any why is this? the higher multiple stocks have better fundamentals

That summarizes my point. No bubble, no near-bubble, then look to the fundamentals. Fundamentals will control where money flows. Those fundamentals are CAP and Growth, and Marketcap to opportunity. Narrowed down even further.

ISRG and AMBD illustrate CAP to maintain a high multiple. a high multiple forever, such as these companies exhibit are only obtainable with very high CAP even though they both have moderate to low growth (ABMD 25-35%, ISRG 12-15%).

Don’t give me Cisco, it was a bubble! That is by definition not part of this discussion as that is a sell sign.

Fundamentals. If you want to go looking for lower price to sale, thinking they will outperform, then you need to find hidden fundamentals, or fundamentals that will turn. Then be patient.

Tinker
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No. of Recommendations: 2
Revenues by Zs are not the same as by most other companies. Why? Higher switching costs, but more than this, after year 1 the revenue stream has very little marginal cost. Compare this to a Nutanix that has to go out and earn its sales every year and pay commissions on it every year

I don’t think that Nutanix is the best opposite to ZS here. The average subscription to Nutanix software is 3.6 years and we’ve already discussed the 72% and accelerating growth in deferred revenue. 6.3x in 3 years to $700M+. I compared to AYX and AYX increased just under 3x over same period, but will see how ZS does in this department. They looked good in the call. I think it likely that in long term analysis ZS is not any better than NTNX in this particular comparison.

Darth
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No. of Recommendations: 6
NPI stocks are almost all "S" curve growth stocks that we aim to own between the bottom and top curves of the "S"

When investors buy stocks with high P/S ratios, those stocks need to grow revenue at least 30%-40% on a yearly basis for many years into the future.


Just an observation: I agree with both statements. Here's the thing - the SaaS stocks so beloved currently will certainly follow the "S" curve pattern. But I contend that, by their very nature (software as a service just one click away), the growth phase will flame out far, FAR faster than the growth phases of famous companies that actually manufactured and distributed physical "stuff". It takes quite a bit more time to manufacture, advertise, distribute and penetrate large markets...many years, even decades. Not so with the SaaS players. They can satisfy their TAMs (I find most estimates to be specious) in a blink of an eye depending on word of mouth. When it comes to software, word spreads fast, very fast.

Enjoy the high multiples while you can. It'll be short-lived.
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No. of Recommendations: 3
On the subject of TAM, SaaS IPOs, and having a stab at where a company is on the S-curve, I have been finding the writing of this VC great reading


On TAM
https://medium.com/@alexfclayton/tam-for-a-saas-company-to-g...


There is a ton of interesting S-1 based analysis here - maybe we can to glean insights into the future from looking at the past

https://medium.com/@alexfclayton

Oh and another plug for help with my community research SaaS spreadsheet for metrics - I think most of the data is up to date, but there are probably things I've missed - the spreadsheet it drectly editable.

https://docs.google.com/spreadsheets/d/1T9AO9ZMUAtVms4hzvbtX...

An introduction to it is here:

https://boards.fool.com/valuations-a-researchcommunity-appro...
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Any why is this? the higher multiple stocks have better fundamentals

Rather to try to explain it at this point, can you list all the tech stocks that have maintained a high P/S for 3 years straight?

I know how we got here with these valuations...but what is the likelihood going forward for annual return.
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I don’t know, I have not been back into the market actively for 3 years yet.

ISRG yes. Appears that NVDA may be yes as well about now. But the multiple is only as good as what it is multiplying and w NVDA that is presently a mower than it was number.

SHOP perhaps. And remember it is not the actual revenue number but what the expected number was that counts. That is how you do it in real time.

I frankly see lots of merit in 12xs position, but as marketcap get larger multiples get smaller. So it is not as straight forward as it sounds because $4 billion marketcap becomes $12 in less than 3 years in higher multiple investments.

Sales force is still 6 to 8x. There is no fixed number as companies are not fungible. If they were you’d pay the same multiple for Qbase as for Microsoft of the like. And yet somehow Apple always had a low multiple past its early days.

Numbers give us contextual information but stocks are non-fungible. The fact that people try to make them fungible by numbers and assuming return to the mean is what creates opportunity for those w the best fundamentals.

Tinker
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Palo Alto probably did as I am sure sales force did.

It may not have caught attention but I get more discerning as the marketcap to opportunity declines.

I got in SHOP only after it grew its marketcap and I put together where most its business came from.

Same w ANET but as 100gb disappointed from narrative.

Not so much w Nvidia as their mkt cap to opportunity still appears high.

There is a big difference between 4 and 12 billion. Btw I have less faith in AYX as their per enterprise selling price remains low. Reducing the opportunity.

So when ZS is at $12 bil mkt cap what I’m perceiving will be different and the multiple will be as well and they do not move in linear fashion. But it will still not be a cheap stock if fundamentals hold.

Tinker
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No. of Recommendations: 2
All of our stocks have had P/S expansions in the last 1-2y. But what about Master card, Verizon? Even they have both increased their P/S by 50% in the last 5y.

https://www.macrotrends.net/stocks/charts/MA/mastercard/pric...

https://www.macrotrends.net/stocks/charts/VZ/verizon/price-s...

Even Arista with slowing growth rates has a higher P/S now than 3 years ago

https://www.macrotrends.net/stocks/charts/ANET/arista-networ...

Classic signs of a late stage bull market? No bubble like 1999. But stretched valuations suggesting lower stock returns in next few years possibly?
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No. of Recommendations: 3
But I contend that, by their very nature (software as a service just one click away), the growth phase will flame out far, FAR faster than the growth phases of famous companies that actually manufactured and distributed physical "stuff". It takes quite a bit more time to manufacture, advertise, distribute and penetrate large markets...many years, even decades. Not so with the SaaS players. They can satisfy their TAMs (I find most estimates to be specious) in a blink of an eye depending on word of mouth. When it comes to software, word spreads fast, very fast.

Maybe...

The duration of the "S" curve is the duration of the technology. The "S" curve itself is made up of three equal length parts with the fast growth middle section accouting for one third.

Relational database (SQL)

A relational database is a digital database based on the relational model of data, as proposed by E. F. Codd in 1970.[1] A software system used to maintain relational databases is a relational database management system (RDBMS). Virtually all relational database systems use SQL (Structured Query Language) for querying and maintaining the database.[2]


https://en.wikipedia.org/wiki/Relational_database

Assuming that NoSQL will dethrone SQL by 2030 the relational database has a total lifetime of 60 years with the middle 20 being the best time to invest. Please note that the "S" curve applies to the technology, not the stock price of any particular company.

Based on the above, Oracle should have been a great investment 1990-2010. Let's check the chart!

https://invest.kleinnet.com/bmw1/stats30/ORCL.html

I would expect base technologies like NoSQL and Flash Storage to be good for at least a decade or two.

Denny Schlesinger
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No. of Recommendations: 1
We can add Paycom to the list of sustained high multiples despite growth “only” at 25-30% but with ROE of 35%+!

As for MAstercard/Visa, that is 5 years of appreciation into a world economy that is removing cash and checks as the primary source of payment. Nearly every such transaction, whether through Square or Paypal or anyone, whether credit or debit goes through Mastercard or Visa. I would expect the multiple to increase as the TAM and the percent of the economy being paid for with said have materially grown.

Plus, as socialism and communism fade further and become more and more a minority (except within what appears to be the Democratic party base) capitalism has rooted around the world opening up economic prosperity to an unprecedent proportion of the world then has ever existed before. All, of course mostly using Mastercard and Visa.

I do admit with the inverted yield curve, Fed who has been over aggressive (how else to we go from the first time in a decade real growth, rising wages, etc. to an inverted yield curve! An overly aggressive Fed (and I would not put it past the Fed to have done so as a “resistance” move against Trump with the mid-terms. Call me paranoid).

The Fed has now stopped raising rates. At this pace they may have to reduce rates again before raising, but we will see. 2020 is a long ways away so there will be no bias towards any election to do the right thing (assuming that played a role, which I believe it did).

Back to admission...that it is much more likely that we trade in a range or go down from here. However, that overlooks a possible resolution to the trade war, or the Fed tapering down, etc. So nothing is written in stone.

As such, instead of getting back into the influence of daily talk and angst, until such time as something gets to the point that I need to sell it (changing fundamentals or valuation relative to fundamentals or simply irresistable opportunity I need to take advantage of) I am going to just do nothing but systematically add, up or down.

If the price to sale is too high, as long as fundamentals remains one year will take care of that. A year to accumulate. However, with high priced stocks, the trip form $3 billion to $12 billion is almost always a lot faster than from $12 billion to $24 billion. Things do not happen in a linear fashion. Thus is marketcap to opportunity remains compelling with continuing and accelerating fundamentals, I do not see why this is not the best strategy.

The alternative is to micromanagement, over analyze, get stuck in the talk of the moment etc. Instead of invest, but also keep one’s ears opened as well without obsessing over it.

Price to sale and valuations matter, but they matter within context. A $4 billion company is valued on a different metric than a $12 billion company that is within the same market. Further, optionality is always underestimated. Optionality is what made Amazon and then Microsoft the most valuable companies in the world (cloud titans). Optionality with Apple the same. Netflix the same (in fact its optionality originally killed the stock).

The problem with optionality is you do not always see it coming, but great management in great companies make it so.

About all I want to express on the subject. We have seen, at least this year the without exception counterintuitive results. I still state it is fundamentals (as I have defined it) in the end that is all, destiny is all, and that different valuation metrics become more useful depending on the context of where the stock stands within it valuation and exploitation of its business potential.

There is information within price to sales, and it is often counterintuitive What is cheap can get much cheaper. What is expensive can get more expensive. I see no correlation that the intuitive result is more likely, rather the opposite.

So, hopefully not too cryptic, that is my opinion, and willing to listen to further thoughts on the topic. I must admit, like with the counterintuitive relationship between price to sale and result, also the less I do the better I do as long as what I did to get there was well thought out.

Tinker
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No. of Recommendations: 3
Thanks Tinker:

PANW - nope....has only had P/S 6-14......never over 20 that I see since 2012.

CRM - nope.....max P/S was 11 and it mostly stays well below 10.

BIDU - yes......2008 through 2011 was 36.7 declining to 24.4 in 2011....then off the cliff to 9.8 in 2012.

Let's look at returns for those years

2008 -68% (P/S 36.7)
2009 215% (P/S 30)
2010 135% (P/S 28)
2011 21% (P/S 24)
2012 -14% (P/S 9.8)

The revenue growth leading into 2008 was 127%, 70% in 2009, 40% in 2010, 91% in 2011, 48% in 2012)So in this case, there were 2 years of pretty amazing returns, then a big drop to even negative returns. As most of you know, the stock has done so so since 2012 with 3 negative return years. This drop in stock growth and contraction in multiple occurred despite decent but slowing growth.

So we now have FB and BIDU as the only 2 examples of a high P/S for 3 years or more.

And both cases didn't sustain stock appreciation shortly after.

Anyone with any other examples?
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https://www.zerohedge.com/news/2018-12-08/everything-bubble-...

Time to sell it all. The last 20 years have been all a bubble by the credit markets and the rooster has come home to collect.

Time to do as my new client did, buy gold! Silver! Bitcoin! This time is different.

Tinker
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No. of Recommendations: 2
on the other side look at this chart.

https://fred.stlouisfed.org/series/LREM64TTUSM156S

I like employment better than unemployment because it is easier to figure and is less prone to politically based manipulation.

Nothing there to suggest a coming recession. So far.
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No. of Recommendations: 14
as socialism and communism fade further and become more and more a minority (except within what appears to be the Democratic party base)

What a silly remark! While there are specific constituencies where a progressive has come out in front, progressive is, at most, democratic socialist (a very different thing than classical socialism, and most of the time just a more progressive version of classic Democratic values that have nothing to do with socialism, as you conceive it, and certainly nothing at all to do with any version of communism.

Mislabeling and miscategorizing people and movements is a sure way to reduce understanding of common goals.
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With apologies, Mauser, since I know that this was not your point, but this is yet another demonstration that the "miracle" under Trump is merely the continuation of a significantly long term trend, most of which was not under Trump. We will see if it continues.
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ATVI is another software company p/s collapsed. Tho there is a revenue growth concern.

I'll take ANET, ACVI, NTNX, for the low side. I'm heavy in all three. Looking for an opportunity to unload ZS, OCTA And some others on the high side.
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ATVI is another software company p/s collapsed.

Hey Torque:

The P/S for ATVI peaked at 6.9 and mostly has been below 6 since 2008.....so no where near 20.

Does anyone else have ay stocks that have maintained a P/S of 20 for 3 or more years?

So far we only have FB and BIDU.
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No. of Recommendations: 5
Facebook is a really interesting case study.
If you had bought FB after the initial P/S expansion, you still had a roughly 20% CAGR for the next 5 years despite the recent drop. But Facebook demonstrated excellent growth in that time even after the P/S expansion. So you really really need to believe your chosen company is firmly in that S-curve ready to dominate the market.

Clearly a lot of stocks discussed here that have had massive gains ytd were precisely due to the derisking of the company and their growth.
MDB - acid and 4.0 being released and move evidence of enterprise companies using it for mission critical systems
TWLO - hidden growth revealed after uber left. Market woke up to this and recognised hyper-growth
TTD - just continued, steady, amazing growth QoQ.


Most companies have some sort of sales or support team. They can't grow these teams instantly. Therefore they're generally capped in terms of sales growth. NTNX as an example, growing billings ~50%, if the whole world decided tomorrow to go HCI, would they be able to jump to 100% growth, or 200%? Or will they be limited by their sales team. They'll be limited. So growth rates into the future will accelerate or decelerate moderately. Being in the S-curve just allows them to maintain a high rate.
Of the above three, perhaps TTD is not limited. They provide a platform for companies to use, if google were to shutdown overnight or some other black swan event or market realisation, they probably could benefit instantly in one quarter.

Derisked Hyper-growth tech stocks, P/S of 20+ looks to be the new norm at this point in time. If we're looking for the next play, as duma suggests, we should be looking for those with P/S 8-12 that has some FUD about it. Or maybe not even FUD, just not quite proven. Either some hidden growth the market hasn't realised yet, or multiple competitors and can't be sure who's going to be the winner. Identify why the market has given their P/S is ~10 and not ~20, and determine whether it's warranted or not.
TWLO - the hidden growth was quite clear
MDB - tinker teased out the dominant mindshare all those months ago.

What about NVDA? If you disagree with the -7% guidance for gaming and think the channel will clear faster than expected, with NVDA gaming growth returning to 50%+, database and autonomous accelerating further, then that's a good shout. But I don't know if we'll be able to infer if that's the case or not.
NTNX? Well, I'm heavily into that. Much discussed already. But it clearly does not have the CAP that say MDB is developing. Yet....:) So there's a higher risk here.

TTD - of duma's table, this strikes my eye as the most appealing. Significantly lower P/S than MDB or ZS, a wonderful company ready to grow and grow and grow. And this despite the incredible run-up.

A shame how ESTC and ZS opened up so high on their IPOs, but such is the age of technology and free information.
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There was one year for YELP in 2013 when its P/S reached 22 from 7 the year before.....before falling to 12 and then 4 in subsequent two years.

In that year, the stock increased 266%.

Then.....

2014 -21%
2015 -47%
2016 32%
2017 10%

NOW had a single year in 2013 when its P/S got to 20....next years stock return was 54% the following year and then a lesser but positive return the next.

WDAY is another stock that joins BIDU and FB for 3 years P/S above 20. It has some parallels with ZS in that it came out of the gates with a high P/S:


P/S Return
2012 38
2013 35 53%
2014 21 -2%
2015 14 -2%
2016 9 -17%
2017 10 54%


So we have 3 stocks now with 3 years of high P/S and can see what the subsequent stock returns were in few years after. We also have 2 other stocks with a single year above 20.

Anyone else?
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While everyone is checking all those stocks that have sustained a P/S of 20 or greater for 3 or more years, please allow me to summarize what we have so far:

1) Only 3 stocks have been identified that have sustained 3 years of high P/S (FB, BIDU and WDAY)

2) One stock has been identified with a single year high P/S (YELP). CSCO was tossed out since it was the 2000 bubble.

3)The subsequent stock returns in the 2-3 years after these high valuations were attained, were more often disappointments.

4)Sustained high P/S seems to be a VERY rare event, so we should be VERY CAREFUL trying to explain it or rationalize why this time is different.

5) There are presently 5 high P/S stocks that many investors here are invested in (MDB, AYX, ZS, ESTC, OKTA). The choice of 20 is a bit arbitrary and other stocks are close to that level such as SHOP, TWLO and SQ when using "adjusted revenue" number).

The above summary may be modified as this thread continues.....please let me know all the stocks you have with high P/S over 3 or more years.

Once we have assembled the complete list, I think Tinker has brought up a very good point regarding whether the "risk" of owning these stocks is any greater than a lesser P/S stock under market duress circumstances. That is, if we hit a recession in 2019, does MDB fall any more than a NTNX?

I hope you are finding this thread of "value" in your own decisions about whether to own or buy these higher P/S stocks.

We are not done yet with this analysis so stay tuned and throw in your 2 cents. Thanks to all who have contributed this far!
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Duma:
5) There are presently 5 high P/S stocks that many investors here are invested in (MDB, AYX, ZS, ESTC, OKTA). The choice of 20 is a bit arbitrary and other stocks are close to that level such as SHOP, TWLO and SQ when using "adjusted revenue" number).


You left out ABMD. (Current P/S=20.7. Before the recent downturn, was >30.)

Intentional omission?
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You left out ABMD. (Current P/S=20.7. Before the recent downturn, was >30.)

Thanks Brer:

I didn’t have it in the original spreadsheet but yes....it joined the P/S >20 club in early 2018 when it tripled in price and had a P/S at its peak of 34.....previous years have been 4-13 going back to 2008.

From that peak of 34, the stock has declined 29% but from the point that it first hit 20 in feb 2018, the stock is up 18%.

But you also raise a question regarding biotech stocks that trade on little to no revenue.....I suppose these would therefore be excluded.....but ABMD is not quite biotech perhaps?
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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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To put some more context on this. Lets look at ABMD. We have followed it here for awhile. Some have bought and held and added others just held their nose and went this thing is far too pricey with its 30x price to sale.

However, if one looks at the one year forward projection ABMD is valued almost identically to ISRG, which is still selling for a multiple in the teens despite a growth rate only in the teens.

Hardly an outlier.

Zscaler is up nearly 30% (well was until Friday’s schallacking) that increased its price to sale. But still, we now are likely to get $285 million perhaps higher for the current year. That means, with little risk, that Zs (at the $285) is selling for 16x at enterprise value. Not 20+. If Zs goes one more year at 50% growth (which is not certain but I think reasonably probable (and possibly from a higher base than $285) then it is 10x on enterprise value (it was 7-8x when I recently picked up a ton).

It seems ridiculous to perceive Zs at selling for years and years and years at 20x+ because it does not have to in order to obtain market killing returns. It does take a little patience, and if you think things move in a linear fashion (which it never does) the valuation becomes quite enticing 6 to 9 months from now as long as the fundamentals remain.

That is my context. Particularly when a company such as MULE can sell for 16x forward revenues and soon Zs will be selling for less than 16x trailing revenues.

If fundamentals hold doing nothing appears to be an extremely good thing to do. Again it all depends on the fundamentals. Now if Zs were selling at 20x+ forward revenues (as it could if we get lucky) then that is a different discussion, and one that fits in here. But it is not, and with revenues growing at 50% for 2 or 3 years in a row Zs can double every 2 years and still not be selling for 20x forward revenues. Heck, if fundmamentals hold, in 2 years it will be selling for 6x revenues.

Thus, it is not 20x that counts, but whether or not the company continues to grow as expected. And note, this does not require 50% growth into perpetuity, such as SHOP appears to be doing, but for 2 years.

Context. Either the investment will perform like this (and you will profit very nicely) or it won’t and you might not.

So yes, valuation matters, but also context of the valuation matters. And unlike say Nutanix that is pushing profitability out to yet another indefinite period of time, Zs (like TTD) is profitable a year ahead of schedule and despite itself. This is an indication of its earnings leverage (without resort to proxies to substitute) and its relative CAP.

Tinker
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If fundamentals hold doing nothing appears to be an extremely good thing to do. Again it all depends on the fundamentals. Now if Zs were selling at 20x+ forward revenues (as it could if we get lucky) then that is a different discussion, and one that fits in here. But it is not, and with revenues growing at 50% for 2 or 3 years in a row Zs can double every 2 years and still not be selling for 20x forward revenhe

Tinker:

That is not consistent with what the research is suggesting. We have ONLY 5 stocks that have ever maintained a P/S at 20 or higher for 3 years......that is it.....just 5.

And of those 5, most underperformed other tech stocks in subsequent years.

I get what you are suggesting.....just hold for 10 years and you can have 20% CAGR which is outstanding.

OK, agree,that is pretty solid return....assuming you aren’t tempted to sell, can handle periodic stock dumps and you really did pick the next ISRG/AAPL to be willing to hold for a decade, etc.

But ZS is not going to do what TTD, MDB and TWLO did this past year....that has never happened and ZS isn’t going to change that IMO. In fact since ZS launched already at a massive ZS, no retail investor is likely to see those type of returns in the next 3-4 years....barring some cult classic stock affect like TSLA.

IMO, we might be better rewarded to find the next early 2018 TTD, MDB, TWLO......those in the P/S 6-12 range.....that have the opportunity to expand multiples.

None of the above three were EVER a turnaround.....we aren’t looking for that IMO.....not a value play......but we are looking for massive revenue growth.....just like the above 3 had all along.
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My point is, it will not be a price to sale of 20 in a few months. The company (absent a big downsize surprise) will be substantially less than 20x in 2 as or so. There is no need to maintain 20x+

Tinker
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My point is, it will not be a price to sale of 20 in a few months. The company (absent a big downsize surprise) will be substantially less than 20x in 2 as or so. There is no need to maintain 20x+

Tinker


Right but for the stock to continue to appreciate from here at large returns.....it will have to stay at a high P/S. That really is the point.....we are dealing with very rare valuations to begin with and then, to get further stock appreciation.....these stocks have to stay in rarified air. That doesn’t really happen in the medium term...but you can, as you say...hold for many years.

WDAY...up 53% the next year....then 3 straight negative years.
Yelp....down 2 straight years.
BIDU....up 135%, then 21%, then negative.
SHOP.....up 33% the year after it hit high P/S.
FB.....43, 34, then 10%.
ABMD...up just 18% since P/S first hit 20.

I know you are not particularly interested in doing as much digging, but do you see anything that looks like a TTD, MDB, TWLO of early 2018 or a SHOP of early 2017?

That is what interests me far more than stocks with P/S already well above 20.

We have had some truly amazing runs with these stocks Tinker.....hope you will come back home just one more time! :)
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TTD, MDB, ZS may maintain 50+ growth for the next two years, with a share price appreciation of 25% per year over the next two years. That'll halve their P/s whilst having a 25% CAGR over the two years. Not bad for arguably derisked stocks. So it depends on your goal I guess?

It sure would be nice to find the next 200% ytd company. Maybe we already have them on our watchlists but we just have to wait for some clear-cut FUD?
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It seems like what you are painting here is that the stocks which have been discussed here lately are not so much LTBH stocks, but more catch-the-wind stocks, i.e., ones where one has to figure out that they are starting to grow dramatically, buy, and then hold until the wind is about to fade and get out. This seems to require both a lot of forecasting, but also lucky timing.
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I think that the next company to rapidly expand its P/S to give AYX, TTD or TWLO in 2018 type returns could be a stock on our radar that starts to accelerate sales, clears up FUD, or one that is recognised as maintaining crazy growth rates.


If the INST new CEO/corporate learning market focus is successful, it is a candidate with current 2019 P/S of 4.9 based on 27% rev growth. 32% drops P/S to 4.7

If STNE keeps up >100% growth, its 2019 P/S drops to 5,

If PAGS growth is around 50%, its next year p/s is around 4.5

NTNX we all know about. Seems like the most like candidate to me... if it can grow software revs at 50%, its next year P/S is 3.3 or so.
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