Company Valuation Multiples & History
A popular way companies are valued is via "multiples" (Price/Sales; Price/Earnings). Understanding the history may help you better gauge your company's future value
What is a Company Truly "Worth"?
One of the most common questions individuals try to figure out is "what is my company worth". It's both a simple question, and highly relevant. In some ways it's easy to answer (e.g. if your company is publicly traded, we can check the price). But most times, what individuals are really focused on is what they believe it will be worth (in the future), or what its intrinsic value is (which can differ from the price markets say it is as of today).
The realistic answer is "we don't know with confidence, nor does anyone." That said, financial theory provide us with various tools that we can utilize to try to estimate value, or get a range of potential values, that might be considered fair. One of the most popular tools are "valuation multiples".
If you're seeking to determine what your company is worth, we also recommend reading: How to Forecast the Future Value of Your Company
What Are Valuation Multiples; Why Do They Matter
Valuation multiples are mathematical ratios or calculations utilizing a company's business financials. While each company (and its business and financial model) is unique, there is also generally a lot of commonality; especially within the same industry and sector. As such, multiples allow one to compare current (or forecast) financial results against other companies -> which helps one more rigorously consider and think about what a company is worth (which, as noted above, is many times the goal)
Additionally, certain multiples can also help an individual compare a company (or a sector, or the entire market) to other asset classes.
What Financial/Valuation Multiples Are Most Commonly Used
There are hundreds of financial ratios, which results in likely hundreds of various valuation multiples; each with their own specific use cases and potential business insight. That said, for the purposes of this article and the audience of this knowledge base (technology workers), we primarily focus on two leading valuation multiples:
Price to Sales. How much is the company worth as a function of its revenue
Price to Earnings ("P/E Ratio"). How much is the company worth as a function of its earnings
Why Does Valuation Multiple History Matter
Why valuation multiples and history matter is an arguably super important question; the annoying answer is "they may not matter". While stock markets are a strong reflection of economic/market sentiment and conditions, they also can also be misleading (and misvalued) for considerable amounts of time; and can change/crash practically overnight. Ben Graham (whose protege is Warren Buffet) famously noted that "In the short run, the market is a voting machine but in the long run, it is a weighing machine".
This all said and disclaimed, we (and most others) believe that stock market pricing and history can provide valuable insight. While appreciating that markets can be misleading at times (e.g. a bubble), and prices can rapidly decrease overnight (e.g. a crash), they strongly impact how most companies (including pre- and post-IPO tech companies) are valued, as well as strongly impact market conditions (e.g. the ability for pre-IPO companies to raise VC funds; or exit via IPO).
For an individual with stock-comp, this also means that markets, and their history, can be very helpful as individuals consider what their company may be worth in the future. Especially when one takes into account that an individual company's value, on average, is 50% a function of the overall market, 30% a function of its industry, and only 20% a company of unique company dynamics.
If 80% of a company's value (on average) is informed by the market, understanding what valuation multiples apply today, and may apply in the future, is an extremely important input in estimating valuation.
S&P 500 Historical Price-to-Sales
Key Question to Ask Yourself: What P/S Multiple is "Fair"
A comment we've heard somewhat frequently from tech professionals over the last 1-2 years is that the tech market is currently in a "trough" (and our questions about when it will "come back"). The underlying financial input need embedded in that question (what P/S multiple that individual should be considering) is in the right place. But in most cases the individual is thinking that the market conditions that persisted in 2021/2022 were "normal" and we we are currently in a "trough" (and things will eventually come back).
At 30-40 Wealth, we believe that 2021/2022 were likely "abnormal years" that we are unlikely to see again. While we will leave the financial prognosticating to others, we believe the data provided above strongly indicates that 2023/24 are not in any way in a "trough". But rather, we are in a "re-normalized" period (and arguably even now, market P/S ratios still appear to be above historical averages)
S&P 500 Historical Price-to-Earnings
Key Question to Ask Yourself: What P/E Multiple is "Fair"
Financial ratios can frequently give similar, but somewhat different results. We believe the same question here applies: was 2021/2022 "normal" and we are in a "trough"; OR was 2021 abnormal, and we are now back to more "normal" market conditions?
At 30-40 Wealth, we believe the historical P/E ratio data also indicates that 2021/2022 were likely "abnormal years" that we are unlikely to see again. That said, we also think the above P/E data provides a bit more comfort in regards to current market conditions being more "normal" relative to arguably "above historical averages" (which is more so what the P/S ratio above implies).
There is no right answer; markets will do what markets will do. But we believe this data is insightful for technology workers as they consider and develop their plans (most specifically when estimating the future value of their company).
Pre-IPO Company Valuation Data
The above utilizes public company data, primarily because publicly companies have financial reporting requirements and thus the available financial data is much more robust. On the private market side, data is more limited; but it does exist. The below data from Carta echoes the public data above that valuation multiples have declined materially in 2022 and 2023.
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