Because of the beating #tech #stocks
took in 2022 I made it my new years resolution to learn more about the black magic of #techstock
valuation. Was reading "Nothing but Net" at the time and learned a lot...here's a summary:
NASDAQ (tech barometer) traded @ forward P/E of 20 from 2000-2020, S&P500 traded at 15X during this time period, S&P500 traded at 15X during this time. Key is to adjust #tech #stocks
for their growth - Is stock trading at premium or discount relative to its growth rate? High growth rates can turn expensive stocks into reasonably priced ones.
Author cites PLCN and FB during their heyday to make the point that #stocks
that trade at discount to premium growth rates can be attractive - i.e., P/E multiples that are below their EPS growth rates
Two specific cases, that as an #investor
you may want to look at to capture potential multi-baggers, author deals with a) Co's with minimal earnings + sky high P/E multiples, and b) Co's with no earnings...let's look at each...
Co's with minimal earnings + sky high P/E multiples
History has shown that some of the greatest #investments
match this classification at the beginning of their run...e.g., Amazon and Netflix
- Can co sustain premium revenue for long period of time?
- Are current earnings being depressed by big investments?
- Is there reason to believe co's long-term op margins can be much higher than current
Between '16 & '20 $AMZN
had very high P/E multiple - median of 72. Author contends was reasonable:
- Platform co w/ track record of expanding into variety of diff. big markets
- Best mix shift story in tech. from retail to AWS/ads; means margins would improve..they did!
What about co's w/ NO earnings?
More of art but ways to assess: Look at comparable public co's & then apply multiple (P/S)
4 factors to help find best comps:
a. similar sized rev base b. similar growth outlooks, c. gross margin d. long term operating margin potential
Q's to help:
- Public co's w/ same biz model that are alread profitable?
- If co not profitable, segments w/in biz that are?
- Reason why scale can't drive biz to profit?
- Concrete steps mgmt can take to get to profit?