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Mei Yun Chin

05 Jun 2021

Stocks

Are valuations still a good indicator when comes to evaluating growth stocks? Are there other ways to evaluate growth stocks?

Looking at it for long term position.

Discussion (6)

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This may not be an answer you make like because many people are just looking for a few metrics they can google to determine the valuation of a business but that is very flawed. Many ratios suggested like P/E, P/S, P/B. EV/EBITDA, are all valuations that do no incorporate growth, they are also relative to the industry/sector and market that the business is part of.

Not sure what your understanding of valuation is but valuation is basically what you think the business is worth in future. This does not change be it growth or any other kind of stocks.

How you value the business may be a better question, and everyone has their own preference. I think it is more important that you first have an open mind to learn different valuation methods. Personally that comes from learning from investors I personally know who are more experienced, watching interviews, listening to podcasts and reading multiple books of the topic. It is a lot of work and valuation is a huge topic because it is ultimately only an ESTIMATE of what someone thinks the business will be at.

This is why you see outrageously different valuations between individuals.

Ultimately you need to imagine buying the the entire company, looking at

  1. Market cap

  2. Total addressable market

  3. Whether you want to value based on revenue, income or cashflows

  4. Market share, moat of company

Not to mention the qualitative aspects of a business and other qualitative aspects that are not directly proportionate to valuations for example efficiency metrics such as margins or return on equity etc...

Studying individual businesses is a lot of work. I think a lot of people are looking for a quick yes or no answer to buy a stock they like but forget it is an actual business, and a few metrics does not accurately tell you the full picture of a business.

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Chris

05 Jun 2021

Owner and Writer at Tortoisemoney.com

I would say yes, valuations are important in evaluating all stocks, not just growth stocks. But not all valuation metrics are important.

For example, P/B ratio is not very useful in general for most types of companies. P/E is also rarely useful for a growth type company where earnings are growing at ridiculous rates or heck, the company might not even have earnings haha as with many growth companies.

However, I think there are useful metrics to consider, which are P/S, Price/Forward Sales (EV/NTM revenue works too) and PEG ratio. These ratios factor in more future figures which I think are key for growth companies. Of course, they do require a bit more estimation, since forward sales or future earnings aren't set in stone unlike current earnings or sales which have already been reported.

I think valuation is still an important indicator to evaluate good company / stocks. If I want to ow...

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