Hi Victor and Rusmin!
How would you value a company like Shopify when their net profits/ FCF are negative due to very heavy investments but the company shows incredible moat with very sticky recurring revenue? Would P/OCF make sense for Shopify?
And on comparison of valuation against its competitors do you think it make more sense to compare against Square or Amazon? Given that there are overlaps in activities for these companies and different stages of business life cycle.
Lastly, appreciate if you have any inputs/ metrics you look at when assessing SaaS companies.
1.Yes, you can use P/OCF to value them but have to make sure that their cash flow are increasing or consistent.
2. I think their closet competitors should be WIX and square. Amazon will not be a good comparison.
3. As for analysing Saas companies, I think the most important things is their retention rate follow by whether are they consistently spending on R&D. R&D is crucial for them to maintain their competitiveness.
Hello Victor and Rusmin,
I want to ask you on the use of Price/Sales ratio to value SaaS companies. I did not want to start a new thread so I thought I would ride on this thread since it is related.
What do you think of using P/S ratio to value SaaS companies? According to Valuation Quadration taught in IQ, P/S ratio is suitable to value cyclical companies whose net income become distorted due to depreciation & amortization etc. The similarity of this with SaaS companies is that SaaS companies’ net income are also distorted due to the cost to build up their businesses etc. Reasons why I am looking at these companies is they have >30% of Gross-Profit-to-Assets ratio which means that they have the potential to grow in the future.
As mentioned above, P/OCF is a good metric to start but I am also looking for more metrics to cover the downside of the businesses due to the risks of SaaS companies. Thanks :)
I think P/OCF will be good to value SAAS companies but if the company is making loss on net profit and cash flow then P/S ratio will be the substitute.
Hi Victor and team,
My understanding is for traditional brick and mortar businesses, it’s important to see a consistent track record of positive net profits.
However, when it comes to valuing SaaS companies, “growth” metrics seems to be more important than profitability.
I understand SaaS companies spend a lot of money to pursue growth (e.g acquiring new customers, market share, RnD) and therefore tend to reflect net losses in their income statements.
The general idea that when their companies become “stable”, they will start to turn a net profit instead.
But isnt there a risk whereby a company can burn money and not generate positive net profit at all?
I’m confused if i should follow the above metrics ‘P/OCF’ , P/S ratios and place less importance on net profit OR wait until the company turns a net profit before deciding to invest.
But this method might probably make me too late to the game.
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