Bullshit Metrics: PEG and EV/R/G

I got a late-stage secondary opportunity today, shopped around by a bank. A major bank. They attached a list of comps and calculated the “risk”: Enterprise Value to Revenue to Revenue growth (aka “EVRG”). It’s almost worse than a Price-to-Earnings-to-Growth (aka “PEG”) ratio. I think the idea here was that there is a high EV-to-Revenue multiple, but don’t worry, the company is growing into it.

Don’t do that.

Just a refresher from my business school days which are 20 years behind me. Or did fundamentals turn out not to be so fundamental?!

  • Growth rate effects are not linear. The effect on valuations is quite drastic for -5% and +5% revenue growth. The same 10% difference might have less effect for companies with 10% and 20% revenue growth. The 10% difference might yet again have a different effect for companies with 40% and 50% revenue growth.
  • Growth rates might not continue. Maybe next year it’s the same or higher, or maybe it’s 50% lower (from +70% to +35%).
  • The company that looks most under-valued on an EVRG ratio basis might be the riskiest firm in the sector.
  • Companies that look “cheap” on an EVRG ratio basis might be companies that grow less efficient and need to re-invest more into growth, with poor project returns.
  • Companies with both very low and very high growth rates tend to have higher EVRG ratios than firms with average growth rates. Careful when comparing.

Look at the EVRG ratios of the following companies:

Example of EV-to-Revenue-to-RevenueGrowth comparison of public companies (as of 09/10/2019)
Example of EV-to-Revenue-to-Revenue-Growth comparison of public companies (as of 09/10/2019)

One could argue that a 20.6x EV/R multiple for Veeva has similar risks as the 5.8x EV/R multiple of Cornerstone onDemand. Or that the EV/R multiple of Qualys has a similar risk than the EV/R multiple of Shopify, as both EV/R and LTM Revenue Growth rates of Qualys are 1/3 of Shopify’s.

But what is up with Twilio and Castlight? Same risk at current EV/R ratio? Or Cloudera — least risky of all of the above? Has anyone checked the earnings of these companies?

Let’s throw in the PEG ratio as well, and it gets confusing:

Example Enterprise-Value-to-Revenue-to-Revenue-Growth and Price-to-Earnings-to-Revenue-Growth (as of 09/10/2019)
Example Enterprise-Value-to-Revenue-to-Revenue-Growth and Price-to-Earnings-to-Revenue-Growth (as of 09/10/2019)

Shopify has a high price ($358.67) and a -$0.71 EPS. Qualys has almost 1/5th of Shopify’s price ($79.35) and a +$1.62 EPS. So: Is Shopify a high or a low P/E risk because it’s PEG ratio is close to -1,000? Is Qualys’ P/E ratio a high risk because of close to a 300x PEG ratio? If it would grow slower, the PEG ratio would even be higher! What does that all mean?!

It means: don’t do these metrics if you’re not absolutely sure what you’re doing. And don’t throw a number at me and tell me “look, you can divide two numbers, and the number means there’s low risk.”

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