No. of Recommendations: 4
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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