@richard_chu97 brought up some great points about valuation. The original thread simply looked at sales fundamentals and the number of companies that were able to maintain high sales growth rates for the past decade. https://twitter.com/richard_chu97/status/1305985808575406080

2) In investing, forecasting a company’s future fundamentals is only the first step, the second is calculating the price you are willing to pay today in exchange for ownership of those expected future fundamentals.

3) The value of any asset is the net cash that is returned to the owner over the asset’s life. As a shortcut, people often use multiples relative to recent fundamentals as a proxy for valuation.

4) Price to sales is more popular for younger, high growth companies that do not necessarily have earnings or positive cash flow since they are still in the investment stage of their life cycle.

5) Taking the original thread further, I looked at these high growth companies, their past valuations (P/S), and their subsequent stock returns. Stock performance is broken down into three buckets: 1. Sales Growth, 2. Change in P/S multiple, and 3. Share dilution consideration.

6) A few notes: There are not a lot of examples in fairly recent history with high growth rates (>20% Sales CAGR) that traded at high P/S multiples (~10x+). Growing at a high CAGR for long periods is very rare and only becomes more rare the larger the starting sales base.

7) There are 10 pretty good examples of companies that were publicly traded since at least 2014, had >20% sales CAGR, and originally had a P/S >10x.

8) These companies are all in the software and internet data services industry since any other higher growth company in a more capital-intensive industry would be hard pressed to trade at such a high sales multiple.

9) The companies ranked by sales growth are: $NOW, $FB, $ZEN, $WDAY, $SPLK, $VEEV, $TWTR, $FEYE, $CRM and $BOX. These companies ALL had very strong sales growth (20%+ CAGR) since that is what we screened for.

10) In other words, they have been very successful and are easily in the top 10% of companies in recent years in terms of growth. There is survivorship bias by neglecting the numerous other companies that originally had lofty growth expectations and failed to perform, etc.

11) Below are charts that breakdown the components/attribution for each company’s share performance. It is overly simplistic but helps break total stock return into 1. Fundamental performance and 2. Market expectations, as well as consider share dilution along the way.

12) Here are the results of the 10 companies: All had strong growth and originally sold for fairly high P/S multiples, 7/10 outperformed the S&P 500 over their respective time period and 3/10 underperformed.

13) The underperformers were $TWTR, $FEYE, and $BOX. $TWTR originally had a P/S of 55x and growth of 25%. Despite such strong growth, expectations were much higher, hence the multiple contraction from 55x 2013 sales to 8x 2021E sales.

14) $TWTR would have had to sell for a P/S of 10x in 2013 vs. the 55x it briefly sold for during the market’s initial exuberance for the stock.

15) $FEYE originally had a P/S of 37x but sales growth of 25% CAGR did not meet expectations, therefore P/S contracted to 3x 2021E sales. To have equaled the S&P 500’s return it would have had to sell for 5x its 2013 sales.

16) $BOX originally had a P/S of 10x but a 21% sales growth CAGR did not meet expectations, therefore P/S contracted to 3x 2021E sales. To have equaled the S&P 500’s return it would have had to sell for 5x its 2013 sales.

17) It’s more exciting to look back at the winners (if only we had the foresight to know they were the winners). These have been some of the best performing companies. In order of sales growth during their respective periods: $NOW, $FB, $ZEN, $WDAY, $SPLK, $VEEV, and $CRM.

18) $NOW sales grew at a 41% CAGR! Add in the modest P/S multiple expansion less share dilution and the stock provided a 37% CAGR since 2012 vs. the S&P’s 10%.

19) If you had the conviction that $NOW could grow sales from $244M to an expected $5.5B over this 9 yr period (very impressive), AND the P/S would hold steady at ~17x, you could have paid 65x 2012 sales and equaled the S&P 500 index!

$FB grew sales at a 40% CAGR as well, though what’s so impressive is they did it off a $5B base! You could have paid nearly 50x 2012 sales and equaled the S&P 500’s return!

20) The rest of the company share performance breakdown are at the end.

21) As @richard_chu97 mentioned, a company that can grow revenue at a 35% CAGR over the next 10 years can see its P/S multiple contract a significant amount and still provide pretty exceptional results; see $SPLK $WDAY charts below.

22) You could pay 40-50x+ sales for these types of companies and potentially beat the market. That said, if the market is expecting a company to grow sales at a 35% CAGR for the next 10 years but grows at a 25% CAGR, stock performance will likely disappoint. $TWTR, $FEYE, $BOX.

Important to note that many may consider software valuations on the high side. Is $VEEV ’s current valuation fair? It has benefited significantly from multiple expansion.

24) I can not stress enough how these companies are the best of the best that were cherry picked for their strong historic growth. It’s easy to look back and see which ones succeeded and which ones failed.

25) Not only are they the best but look how small they were before they compounded at such high rates. Only $FB and $CRM had sales >$1B, most had sales ~$200M. If you are projecting 30%+ sales CAGR from a larger base (>$500M), the TAM better justify those expectations!

26) There are only ~20 software & internet service companies with 2020E sales >$1B, and only 10 with sales > $2B. Those numbers are sure to grow over the next decade as software becomes an increasingly important part of the economy but there are very few that get to global scale!

27) It's worth paying a high P/S multiple for the very rare, truly exceptional company if you gain the conviction they have a brighter future than what is discounted in the current stock price,

28) however enthusiastic and optimistic outlooks that are widely recognized are typically a poor place to start when searching for attractive investments.

29) Full disclosure, @sagapartners is a long-term bull on the space, owns a few SaaS companies, and just enjoys looking at data. Hopefully this helps others put growth, valuation, and expectations into perspective. Investing is about forming a range of expectations, and then

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