The Lemon Fool

I'm thinking about firms which are yet to make accounting profits, but are clearly growing their revenues. One obviously can't value on P/E in these cases, so P/S seems a half decent fallback.

Appreciating that some might reply "Matt there aint no magic formula for pricing a share", clearly the market participants who help a firm IPO and the people who attempt to make a market for the shares, will employ some rule of thumb. Some will be based on last reported sales and recent growth in sales, some on forecast growth and some on information which probably is not public knowledge. This "rule of thumb" interests me!

I have limited experience of these firms but wondered if anyone here had ever seriously attempted to analyse these situations. My only experience so far was indulging in Ceres Power (CWR) and fluking a big gain. I have now exited that position.

I now hold Moderna (NASDAQ:MRNA) which recently went into profit, and Darktrace (LON:DARK) which are yet too, though are growing their revenues. Anyway, obtaining current p/s figures from MorningStar, I've attempted to compare the 3 companies I mentioned above:

Firm        | Price/Sales
Moderna     |        25.2
Darktrace   |        21.9
Ceres Power |        97.9

Focussing on DARK since MRNA is now in profit, and ignoring CWR since its figure is almost an order of magnitude out of kilter with the other two, it seems that a P/S of about 20, combined with just reported revenue growth of 41.3% might be quite a reasonable price. I'd be interested in opinions from any others out here who have attempted to sensibly price a young pre-profit growth company.

All sensible answers received will be entered into a raffle to win a set of steak knives and a week for two in Torremolinos.

thanks Matt

I have this issue with DP Poland!

It is forecast to break even in 2022 on a free cash flow basis but it is growing rapidly. Their EBIT in 2023 will be way down on the forecast EBITDA due to anticipated pay down of merger debt. I've used revenues but I also look at EBITDA forecasts out to 2023.

Best wishes


Mark.

ADrunkenMarcus wrote:I have this issue with DP Poland!

It is forecast to break even in 2022 on a free cash flow basis but it is growing rapidly. Their EBIT in 2023 will be way down on the forecast EBITDA due to anticipated pay down of merger debt. I've used revenues but I also look at EBITDA forecasts out to 2023.

Best wishes


Mark.

Thanks

I was thinking of looking at previous sales, and the previous costs and extrapolating both. Presumably, with everything running according to this theoretical model, the year after breakeven i.e. when sales==costs they would achieve positive PBT.

Matt

Yes, I think is is a very difficult thing to estimate.

In DP Poland's case it may be somewhat easier when they release their first half results and the third quarter trading update in October. They are committed to doing an investor presentation and Q&A which is helpful. They even answered my question last time.

Best wishes


Mark