High Growth Valuation Landscape & Commentary – December 22, 2023
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
If you follow me closely on Twitter, you know that I like to post quarterly comp sheets comparing valuations of firms in similar stages of maturity. I wanted to share the most recent iteration of my EBIT comp sheet and compare how the averages have trended over the past year. I will be doing this quarterly going forward.
Across all 5 columns, things have gotten noticeably more expensive over the last 3 months. The EV/Next 12-Month EBIT category has expanded by about 5 turns with the others expanding materially as well. Why is this happening? Likely in response to rising expectations of an increasingly dovish Fed. As rate expectations fall like they are right now, expectations of future free cash flow discounting diminish. This makes $1 earned in FCF 5 years from now more valuable today than if interest rates (AKA discount rates) were to keep precipitously rising. Multiple expansion can be expected during easing cycles. Markets are always looking a few quarters ahead. They seem to be looking ahead to easy monetary policy, which was telegraphed in the last Fed statement.
Like in 2021, when hawkish policy commenced, things have recently changed. Don’t fight the Fed now means to own equities, while it has meant the opposite for the last nearly 2 years. So for me? This will mean widening the multiple expansion bands required for me to trim a position and shrinking the multiple contraction bands needed to justify accumulating. Things have gotten more expensive, and they’ll likely continue to get more expensive as we begin a new easing cycle. Candidly, things are a bit overheated right now and I’d love to see markets cool off for a few weeks. This is just me saying that if this occurs, the bar for accumulation has been lowered.