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The latest market seesaw penalized nearly every player in the cohort. While Sinch’s market cap was up 7%, everyone else fell by double-digit percentages. The martech names took the worst beatings, with Klaviyo, Braze, and Upland hit hardest. And yet, the entire cohort made more money last year than the year before. As much as the stock market is a machine, it’s a complicated one when it comes to tying asset price to value.
How the Comparison Works
Once all companies have released their earnings reports, I do the simple math (or more accurately, I let Koyfin do it for me): divide the company’s market cap by its trailing twelve-month (or last twelve-month) revenue. The idea is that, given enough time, all the good or bad news gets priced in. At that point, the market is, at least in theory, valuing each company without recency bias. The limitation is that the comparison happens three months after the quarter has closed, and it doesn’t account for whatever else is going on in the broader market.
Sidebar: Value Investing
We don’t talk much about value investing here. First, because this isn’t an investment blog. Second, because there are plenty of Bogleheads, Buffetologists, and dyed-in-the-wool value folks who cover it far better than I ever could. It’s just not in my circle of competence.
That said, if you’re curious, here are two books that really helped clarify my thinking:
- Common Stocks and Uncommon Profits by Philip Fisher. (Read my review here.)
- Pioneering Portfolio Management by David Swensen, who ran Yale’s endowment and grew it into one of the largest of its time. It’s the best guide I’ve read on asset allocation, mostly because it actually covers all types of asset allocation.
“Entrepreneurial firms provide the greatest likelihood of dealing successfully with ever changing market dynamics, ultimately increasing the chances of delivering superior investment returns. Unfortunately, successful firms contain the seeds of their own destruction, as size inhibits performance and age saps energy. Vigilant fiduciaries stand ready to cull the old and tired, while identifying the new and energetic.”
Swensen, David F. Pioneering Portfolio Management (p. 295).
Even so, I believe that the first job of any business leader is to be a competent capital allocator.
The Multiple Calculation
A multiple based on LTM revenue is just one lens. The other is valuing a business by profitability (like EBITDA), but that takes more work and, honestly, shifts the conversation away from growth. The market will always pay a premium for high growth over profitability. As tough it is to run a profitable business, it’s even harder to grow it sustainably.
Finally
I won’t tell you what you should or shouldn’t do. But I can tell you what I’d do.
When chaos and change push me into fear, uncertainty, and doubt, I try to invert the question: What won’t change? I sit with that and follow where the answer leads.
That’s when my unskeptical optimist kicks in. Messaging is a core part of the human experience. That won’t change. And as long as we keep delivering value at a price people can accept, the business will endure. The key is to keep our wits about us. To quote David Swensen:
“Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.”
Swensen, David F. Pioneering Portfolio Management (p. 253).