4 ms·

Call me old-school, but I still don't buy into these "revenue multiple" nonsense. Traditional valuation metrics like PER, EV/EBITDA, DCF etc. all tie back in on

Call me old-school, but I still don't buy into these "revenue multiple" nonsense. Traditional valuation metrics like PER, EV/EBITDA, DCF etc. all tie back in one way or another to the cashflow-generating potential of a company. Revenue multiples have, at best, only tenuous relationship to cashflow. If you sell $10 notes for $1, in theory you can have infinite revenue. I wish investors would just stop pretending tech valuation these days have anything to do with financials, which is actually fine. Maybe it is time we shift what we think the equity market is about. Nowadays its less a place to go looking for returns and more one-giant-PATREON where you buy a stake just because you are a fan.

TuringNYC 6y ago
>> Revenue multiples have, at best, only tenuous relationship to cashflow. If you sell $10 notes for $1, in theory you can have infinite revenue. Sure, but revenue multiples are specific to a business or product type. A consulting company's revenue multiple might be 2x or 3x. A cloud-based SaaS with no hands-on setup might be 10x. A HelloFresh/BlueApron business might be, say, 7x. For some types of businesses, I wouldn't even pay 1x. If an investor is applying the wrong multiple to a business, they wont be around for long.
throwaway837 6y ago
old school investing approaches would’ve lost you a lot of money in the 2020 market.
- onepointsixC 6y ago
  Old school would have never dreamed that the Fed would pump the market to prop up securities.
texasbigdata 6y ago
I've done a DCF of a tech SaaS S-1 to test at the advice of a friend who is a PM in tech at a hedge fund. It still seems like magic, and even more so then, but it penciled. Sponsor got in with the last pre-IPO round (think like a Wellington/Fidelity who essentially buys their IPO allocation by entering slightly early) at $3.5B, IPO was $4.5B, and Friday night post dinner w/ redbull DCF spit out ~~$5.0B to $6.5B. After a few months it trended up to that Enterprise Value. The mind is simply not good at understanding compounding at 70% (or whatever) free cash flow conversion. Not having COGS or working capital or CAPEX is magical. That being said it’s insanely hard to move from a “things might be worth 10x EBITDA” to “things might be worth 10x revenue”. It’s like using different parts of the brain (left vs right) or quantum physics versus more traditional physics: there’s some magical stuff that’s probably rules based with underlying structure underneath that just doesn’t make sense. Just one anecdotal example.
- andreilys 6y ago
  How do you explain Tesla’s 1200 PE ratio despite its COGS, working capital and CAPEX?
  - texasbigdata 6y ago
    It wasn’t Tesla. Sorry, don’t trade. Enterprise B2B SaaS. :)
  - oblio 6y ago
    Easy. The market is frequently irrational. Unfortunately the market can stay irrational longer than you can stay solvent so...
einarvollset 6y ago
A 7x revenue multiple < 15x ebitda multiple with 50+% free cash flows. That’s that most old school investors can’t seem to understand. Weird. Basic math.

TuringNYC 6y ago

>> Revenue multiples have, at best, only tenuous relationship to cashflow. If you sell $10 notes for $1, in theory you can have infinite revenue. Sure, but revenue multiples are specific to a business or product type. A consulting company's revenue multiple might be 2x or 3x. A cloud-based SaaS with no hands-on setup might be 10x. A HelloFresh/BlueApron business might be, say, 7x. For some types of businesses, I wouldn't even pay 1x. If an investor is applying the wrong multiple to a business, they wont be around for long.

throwaway837 6y ago

old school investing approaches would’ve lost you a lot of money in the 2020 market.

onepointsixC 6y ago
Old school would have never dreamed that the Fed would pump the market to prop up securities.

texasbigdata 6y ago

I've done a DCF of a tech SaaS S-1 to test at the advice of a friend who is a PM in tech at a hedge fund. It still seems like magic, and even more so then, but it penciled. Sponsor got in with the last pre-IPO round (think like a Wellington/Fidelity who essentially buys their IPO allocation by entering slightly early) at $3.5B, IPO was $4.5B, and Friday night post dinner w/ redbull DCF spit out ~~$5.0B to $6.5B. After a few months it trended up to that Enterprise Value. The mind is simply not good at understanding compounding at 70% (or whatever) free cash flow conversion. Not having COGS or working capital or CAPEX is magical. That being said it’s insanely hard to move from a “things might be worth 10x EBITDA” to “things might be worth 10x revenue”. It’s like using different parts of the brain (left vs right) or quantum physics versus more traditional physics: there’s some magical stuff that’s probably rules based with underlying structure underneath that just doesn’t make sense. Just one anecdotal example.

andreilys 6y ago
How do you explain Tesla’s 1200 PE ratio despite its COGS, working capital and CAPEX?
- texasbigdata 6y ago
  It wasn’t Tesla. Sorry, don’t trade. Enterprise B2B SaaS. :)
- oblio 6y ago
  Easy. The market is frequently irrational. Unfortunately the market can stay irrational longer than you can stay solvent so...

einarvollset 6y ago

A 7x revenue multiple < 15x ebitda multiple with 50+% free cash flows. That’s that most old school investors can’t seem to understand. Weird. Basic math.