SIMON BROWN: A number to know backwards and forwards

Investing is all about the future, even though we only have historical information and a live price that reflects the immediate willingness of others to buy or sell an asset.

The idea that we as investors are buying the future helps us value a stock today. Value is, after all, the net present value of all future free cash flows.

However, a lot of the backward-looking valuation tools we use could instead be forward-looking and so potentially more powerful. (Of course, they could also be more wrong, given that the future is unknown.)

Take the earnings multiple. The historical p:e gives you a number that you can compare against the same company’s earnings multiples for previous periods or against those of peer stocks. Such comparisons can tell you where the stock is relative to what the price and earnings have been in the past.

The forward multiple is also very useful. Here, instead of using last year’s earnings, you’re using the next year’s expected earnings and today’s price. The risk here is obvious. What if the earnings are not as expected? Well, then your entire investment thesis starts to crumble. (As an aside, I am seeing a lot more use of the phrase “next 12 months”, or NTM, which basically means the same as “forward”.)

Here’s an example of how it gets us thinking.

SpaceX recently listed with revenue (not earnings) of about $20bn, giving a current price-to-sales ratio of over 120 at a share price of $185, meaning a market cap of about $2.4-trillion.

Now let’s roll it forward. My Koyfin data shows expected sales of $90bn for financial 2028, ending in December 2028. That sets the forward price-to-sales ratio at a much lower 26. The NTM price-to-sales ratio for both CrowdStrike and Cloudflare is 28; for Apple, Microsoft and Alphabet, it’s about eight.

So perhaps SpaceX is not that expensive, considering it is almost certainly going to grow revenue three times faster than any of the old-school tech stocks.

But here’s the real point. This is for financial 2028. This means we have to be comfortable with the company being able to grow sales from $20bn to $90bn — a big ask. Further, there should be no significant new issue of shares. I would expect new shares to be issued, but not significant amounts.

Lastly, this assumes no price change between now and December 2028, which is the big one. Surely any buyer now wants price appreciation? Of course, if you buy now, price gain is fine as long as you don’t mind holding an even more expensive stock in the years ahead.