No. of Recommendations: 80
Ticker	Mkt Cap	 TTM Rev (in millions)
MDB 4.3 B 216
WIX 4.4 B 558
AYX 3.8 B 182
NEWR 4.7 B 413
TWLO 9.9 B 561
PAYC 7.6 B 530
ZS 4.9 B 214
ESTC 5.3 B 212
SHOP 15.9 B 952
TDOC 3.8 B 372
SQ 30.5 B 1,405
OKTA 7.3 B 362


We throw around the PS ratio a lot, but what it doesn't give you is the size of the numerator (Mkt Cap or "Price") or the denominator (TTM Rev or "Sales"). I could look at this table all day, but here are the things that jump out.

SHOP and SQ dwarf the rest in both revenue and market cap. It might be harder for these two to double revenue in the next couple years than it was in the last couple.

Other than SHOP and SQ, there are 3 companies with revenue over 500m, TWLO, WIX, and PAYC. TWLO is growing by far the fastest and its valuation seems in line with what I would expect. PAYC is growing slower, but is very profitable and its valuation also makes sense. WIX seems undervalued to me...I feel it should be close to PAYC. Just seems to make sense -- more revenue, growing a little faster, a little behind in profitability.

ZS, ESTC, MDB, and AYX all have around 200m of revenue. They're probably separated by a quarter or two of growth. These little powerhouses are also all growing revenue amazingly fast -- at rates around 60% or even higher! When I think about it that way it makes me love AYX because it's the smallest, and the most profitable. But I also love MDB -- arguably the best bet to grow the fastest over the next couple years. Still, ZS's growth is actually accelerating! And ESTC's might be slowing a bit, but it was the fastest grower of the 4 to begin with. It's the one I'll be watching the closest, as it's also the most expensive.

Lastly, NEWR looks like a real bargain, despite growing slower than some, because the profit engine is in gear.

Anyway, I just find it really useful to look at these two numbers and think about all that goes into them and what it might mean for the future. This probably isn't the best post to get the discussion started on any of these companies, but I thought it was really interesting.

Bear
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No. of Recommendations: 10
I don't have the bandwidth currently, but what this chart begs to have added is the company reported TAM and the growth rate. I believe those two numbers would tell the story of who has the most runway left and who is marching the strongest towards it.

And - I've said this before about Wix - my hangup with that company is that it has real competitors in the space and feels like a one-trick pony. How does it expand beyond "really cool websites"? I think Wix is likely to be bought up by another company who wants to add web design as a branch.

For further discussion, I purchased my Christmas tree today on a Shopify swipe attachment vs a Square swipe attachment. I was not aware of that expansion. Duopoly's are okay to me. I think mobility is a huge trend in business.

LONG mobility and ecommerce offerings, especially when bundled.
LONG one-stop solutions for business and merchants.
LONG land and expand.
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No. of Recommendations: 3
I don't have the bandwidth currently, but what this chart begs to have added is the company reported TAM and the growth rate. I believe those two numbers would tell the story of who has the most runway left and who is marching the strongest towards it.

Growth rate is definitely in my head when I look at the Mkt Cap and TTM Revenue. Still, I wanted to keep it simple...not trying to use this exclusively to make decisions. Just a good thing to use as a guide while taking into account everything I know about these companies.

And - I've said this before about Wix - my hangup with that company is that it has real competitors in the space and feels like a one-trick pony. How does it expand beyond "really cool websites"? I think Wix is likely to be bought up by another company who wants to add web design as a branch.

Why don't you think Wix could evolve like Shopify and Square did? Sure, they're not going after the large businesses (yet), but that doesn't mean they can't build out more and more services. In fact, they're already doing this. Wix Code and some of their other innovations are driving larger customers to use Wix, and those customers spend more, etc, etc. The fact that they're doing it profitably and slowly...not making too many waves with the larger competition...is fine by me.

Bear
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No. of Recommendations: 23
Thanks, Bear.

I setup a simple table like this that gets updated with my top 20 stocks (MC, EV, TTM Rev, Rev growth rate, Operating margin, etc.). I'll see if I can create a shareable link this weekend. But I think it's a very valuable exercise to view the list and put things in perspective (i.e. when SQ was trading at $100, it was large market-cap-wise and getting very pricey from an EV/S or P/S perspective - not a good combination).

And at risk of becoming the NTNX-guy, which I definitely don't want to be known as...haha...I have owned TTD, TWLO, and AYX since mid-2017 and believe those + MDB form my core "non-trading" holdings. I don't write about TTD, TWLO, AYX, and MDB as much because they are just easier to understand and well-covered on this + NPI boards (although I've been tempted a few times to write a little about CTV for TTD and enterprise data analytics for AYX, which I can add some "semi-professional" perspectives).

Re: NTNX, if you add them to the list they become a pretty significant outlier. MC of 7.9B with TTM Rev of 1.193B. EV of 7.4B.

Stephen
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No. of Recommendations: 2
Interesting to come across this thread that has a similar theme to the idea I posted over on the NPI board yesterday, independent of having seen this thread here.

https://boards.fool.com/work-in-progress-valuation-methodolo...

For simplicity, I'll go ahead and paste the meat of my post over there here below:

Just thought if this as I drove back from a work meeting, so have yet to try real number with this but I think it has some potential utility. Basically it will end up with 1 number that should roughly determine over or under-valued.

Inputs:
Rule of 40 # (R40)
EV/S ratio

Calculation (subject to tweaking):
R40 divided by E/S ratio + 1-yr change in R40 divided by EV/S x adjustment factor

Not sure what magnitude the adjustment factor should have yet, but once this methodology is applied for enough different companies (maybe 5 or 25 different companies), I think a proper coefficient could be approximately determined.


Still haven't had time to plug in any actual numbers, but if anyone else wants to start it out, I think it could be useful.

-volfan84
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No. of Recommendations: 18
I have been playing with Volfan's proposed metric of R40 divided by the forward 2019 EV/S ratio. I through in a couple of the larger cloud companies to see where they fit in as well. Here's what I found

Wix: 9.28
TTD: 8.86
MSFT: 8.58
TWLO: 6.73
PAYC: 6.49
SHOP: 6.04
SQ: 5.81
ADBE: 5.45
CRM: 5.23
AYX: 4.56
NEWR: 3.67
ZS: 2.73
NTNX: 2.36
OKTA: 1.89
MDB: .72

My takeaway is that using R40 really brings operating profit margin to the fore, putting it on par with accelerating revenue growth. We tend to emphasize revenue growth here. This makes sense to me. If revenue growth is accelerating and operating profit margin is improving, that's wonderful, but if you have to choose between the two, it's the revenue growth that is a better indicator of a healthy business with a long runway of growth.

Still, the results here are interesting, Wix is getting its turn to shine, and MongoDB finished dead last. There has been a lot of euphoria about Mongo on the board, and seeing this made me take a step back and consider that although Mongo has incredible revenue growth, it also has a high valuation and is still losing a lot of money. Losses continue to rise, as revenue goes up, albeit that revenue is going up faster.

I am thinking back to nutanix and the debacle about subscription revenue vs service revenue. I'm wondering if that applies to any of the other companies here, particularly elastic and mongo. From what I have gleaned it seems as if Elastic has a fairly high amount of service revenue. I don't know how Atlas work, and I wonder how much Atlas support Mongo needs to provide to each customer. The thesis for these sorts of companies is that costs will continue to rise linearly, and eventually revenue will take off exponentially. But if costs and revenue continue to rise in line with one another, the thesis fails.

It's really beyond me to make a good guess about how the cost vs revenue question will play out. Since Mongo is such a high confidence position here, I'm interested in people's take.

Does this metric mean anything?
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No. of Recommendations: 39
I have been playing with Volfan's proposed metric of R40 divided by the forward 2019 EV/S ratio. I through in a couple of the larger cloud companies to see where they fit in as well. Here's what I found

Wix: 9.28
TTD: 8.86
MSFT: 8.58
TWLO: 6.73
PAYC: 6.49
SHOP: 6.04
SQ: 5.81
ADBE: 5.45
CRM: 5.23
AYX: 4.56
NEWR: 3.67
ZS: 2.73
NTNX: 2.36
OKTA: 1.89
MDB: .72




Hi Bodhibob,

I was fascinated by your table and tried to see if I could find some explanation.

First, I’d say that where a company is on its trajectory is important. For instance, Mongo is just starting out and has only about $200 million in revenue this last year. That’s tiny and very early, and companies just starting out have much higher losses compared to revenue until they get some scale. However, their adjusted net loss as a percent of revenue last quarter was about 24.5%, improved from 37.0% and 45.0% sequentially. And if you look back year-over-year it’s improved from 44.5% the year before, and from 58.5% the year before that.

Okta is also very early in its life with just $400 million in revenue, twice Mongo’s, but its loss was less than 4% last quarter, compared to 27% the year before.

Second, some companies may have their price held back by other concerns, such as political and danger of war for Wix, headquartered in Israel, The Trade Desk by being in advertising where so many other companies have failed, so it’s hard for them to get the full stock price credit they deserve, and Microsoft, because it’s so large that no one sees them doubling much less quadrupling any time soon. Their relatively low prices compared to revenue may put them up at the top of your list.

Third, companies like Mongo, Okta, Zscaler, Elastic, and Alteryx have huge goals and huge expectations of literally taking over worldwide fields of storage, identity, security, search, and data analysis, while for instance Wix and Paycom are in little niches of helping people set up free websites and low and middle size payrolls. This may help explain higher prices in relation to profits for Mongo, etc.

Then there is Twilio, which is also taking over a world-wide field, and has a high stock price, but, at $600 million revenue, is established enough now that it is actually making a little money.

Fourth, basing forward EV/S on guidance and consensus estimates is… well, to be gentle, I’ll say an uncertain process, as some of these companies guide so low that I don’t even bother reading guidance any more for most of them. Larger S, of course, makes EV/S smaller, and makes your number above larger.

Interesting table though.

Thanks

Saul
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No. of Recommendations: 6
First, I’d say that where a company is on its trajectory is important. For instance, Mongo is just starting out and has only about $200 million in revenue this last year. That’s tiny and very early....

Best illustrated by the "S" curve (trajectory) and market penetration (tiny and early).


Fourth, basing forward EV/S on guidance and consensus estimates is… well, to be gentle...

I'd be happy if they got rid of guidance altogether. As for "consensus" estimates, they are not a consensus at all but an average of various guesses no better than yours and mine.

What counts for me are revenue growth and improving margins, gross, operating and net. These are the numbers that drive price in the long run.

Denny Schlesinger
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No. of Recommendations: 0
Glad to see someone put some numbers together with my idea, as I have yet to have a chance to.

I agree with Saul and Denny that trying to use a forward-looking number for this metric is probably not a great idea. Using the latest quarter's number is probably better. Adding on the additional factor with the yet-to-be-determined coefficient should help account for the trajectory of a given business (quarter over quarter R40 change x TBD coefficient).

Determining the proper coefficient as I have envisioned it would include trying to normalize the values to be closer to each other, and could use price ranges from a number of different quarters (a la Tom Engle's trading ranges). For a given period (a quarter), the sales number and the R40 and the quarter-over-quarter change in the R40 would be set numbers with the EV varying with the share price.

I'm hoping that later in the week next week I might be able to put together something to try to determine a proper coefficient that brings the concept together.

volfan84
Time to watch my #7 Vols face #1 Gonzaga
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No. of Recommendations: 1
I have been playing with Volfan's proposed metric of R40 divided by the forward 2019 EV/S ratio. I through in a couple of the larger cloud companies to see where they fit in as well. Here's what I found

Wix: 9.28
TTD: 8.86
MSFT: 8.58
TWLO: 6.73
PAYC: 6.49
SHOP: 6.04
SQ: 5.81
ADBE: 5.45
CRM: 5.23
AYX: 4.56
NEWR: 3.67
ZS: 2.73
NTNX: 2.36
OKTA: 1.89
MDB: .72

My takeaway is that using R40 really brings operating profit margin to the fore, putting it on par with accelerating revenue growth. We tend to emphasize revenue growth here. This makes sense to me. If revenue growth is accelerating and operating profit margin is improving, that's wonderful, but if you have to choose between the two, it's the revenue growth that is a better indicator of a healthy business with a long runway of growth.


bobhibob, if you have them handy could you provide the R40 numbers you used in these calculations for quick reference (and did you use revenue growth rate + FCF margin %)?

Thanks,
volfan84/Joel
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No. of Recommendations: 0
Hi Volfan,

I used revenue growth rate + operating margin. I used the operating margin number from marketscreener.com and the q/q revenue growth rate from finviz.

MDB 12.29
OKTA 31.61
NTNX 11.94
ZS 45.92
NEWR 35.29
AYX 57.89
CRM 40.1
ADBE 56.17
SQ 63.3
SHOP 58.36
PAYC 68.24
TWLO 68.72
MSFT 50.9
TTD 79
Wix 47.71
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No. of Recommendations: 10
In case it is of any value, I've been putting this table together with help for the last few months. Feel free to play with it.

The rev growth / operating /gross margins are generally taken from the most recent reported quarters.

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

Intro to it was here:

https://boards.fool.com/valuations-a-researchcommunity-appro...
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No. of Recommendations: 1
In case it is of any value, I've been putting this table together with help for the last few months. Feel free to play with it.

The rev growth / operating /gross margins are generally taken from the most recent reported quarters.

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

Intro to it was here:

https://boards.fool.com/valuations-a-researchcommunity-appro...

------------------------------------------------------

tchalla,
I perused the sheet a bit yesterday. It does appear to have a lot of similarities to my thought on a "new" (maybe not entirely new) unified valuation metric. I'll have to peruse it some more in the future.

Post about "new"/"unified" valuation metric:
https://boards.fool.com/work-in-progress-valuation-methodolo...

-volfan84
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