Price-to-sales is the best way to buy at pre-
pandemic levels for unprofitable or recently
profitable growth stocks. Other metrics like P/E
work in different scenarios (i.e., the company was
profitable long before the pandemic), but I opt for P/
S.
Fiverr stock currently trades at $78/share. For most
of Q1 2020, the stock hovered in the mid $20s. Then,
the pandemic skyrocketed the price because it
worked for Fiverr's business model. Since being
priced at the mid-$20s, Fiverr has come close to
tripling its revenue (from 2019 to 2021. We don't
have Q4 2021 yet but other quarters suggest we'll
get close to tripling revenue from 2019 to 2021).
If a company grows that fast and maintains 40%
YOY revenue growth post-pandemic (so far, it has
maintained that threshold and grew at that rate
before the pandemic), it does not deserve to be
priced in the mid-$20s. If that pricing mismatch
happened, investors would heavily load up on the
stock to reflect the mispriced asset. The stock price
should move to reflect revenue and earnings growth.
Depending on which part of the chart you look,
Fiverr's P/S hovers between 5.5-6.5 pre-pandemic.
That would imply Fiverr's price gets cut in half for it
to return to that P/S level. However, the damage
would stop there assuming it stays at the pre-
pandemic P/S. I can wait for a stock like Fiverr and
look more closely at stocks with a smaller gap
A company with 40% YOY revenue growth will
lower its P/S ratio quicker than a company with 20%
YOY revenue growth, especially if the stock price
stays flat or declines.
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