No. of Recommendations: 9
Very interesting Saul....one way to consider the question is to consider how long it will take for the EV/S to "catch up," or "normalize." Just throwing this out there for everyone....a spitball in the thought experiment world.

Back a ways, we thought that a PE ratio of 10/1 for a stable growing company was about right. That is, a wallet you buy for $10 today that will spit out $1 every year was reasonably priced. But pay $50 for that wallet, and maybe you won't get your money back. It was/is a way to evaluate where the market is compared to a metric you could understand.

EV/S wasn't considered years ago (part of why Amazon was ridiculously underpriced for what it has become). In the EV/S ratio world, we aren't talking about generating earnings (yet). We are talking about expectations; that a hyper growth company will eventually grow up and have positive earnings and cash flow.

So how long until your "bet" that ZS will grow into your price will work out? Right now EV/S is about 35.

We can try to forecast positive earnings and cash flow, but those goalposts keep moving in growing companies. Let's look at how long it would take, if you freeze the price, to come to a 1-to-1 EV/S ratio.

From last January with the prior 12 months at $242.9 M and the valuation above $8 billion, a frozen price from now, with a growth rate of 65% gets you back to 1/1 in 7 years:

0 $242.9
1 $401 M
2 $661
3 $1,091
...
7 $8,087

A 100 EV/S ($24 Billion?), frozen today, would take a while longer, but because of the amazing benefits of compounding, you would get there (roughly) in only two more years.

8 $13,344
9 $22,018

So the Devil (is very much) in the Details otherwise known as "it depends."

If you know the market you are building into won't allow growth to continue, then the math needs to fit the real world - "execution...and...how much of a market it has in front of it." At some point we bump into real world limits. So it depends.

Anyway, the above is just FWIW and YMMV.

Cheers,

Bill
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