In a stunning move away from the conventional measures of earnings, including adjusted EBITDA and EBT, Wall Street analysts have agreed that the valuation of stocks should be premised on EBITDA-O and EBT-O, both of which are centered around a concerted focus on the top line.
The additional -O removes the burden of operating expenses from both EBITDA and Net Income, as they were seen to be creating a drag on earnings for many companies, and artificially inflating their P/E multiples.
“The removal of operating expenses from earnings, allows investors to focus on growth, without getting bogged down by the cost of this growth” said Ignor Bubblosky, head of Goldman Sachs Equity Research arm.
Ignor went on to add that many investors are wrongly focused on the traditional definition of valuation metrics like Free Cash Flow and adjusted EBITDA, and that the new investor paradigm should focus on EBITDA-O and EBT-O.
When asked about the difference between these two metrics and simply revenue itself, Ignor snapped back “Of course there is a big difference. We must adjust revenue to accommodate reversal of provisions, and other items like interest income which benefit EBITDA-O”
At a time when the impact of COVID-19 has created enough challenges for companies to maintain and/or achieve profitability, we all need re-examine the basis of valuing companies.
Based on these revised metrics, Goldman Sachs has issued revised price per share targets of Tesla and Apple, at 125,000 and 25,000 respectively. Ignor added “These are potential 50 to 100 bagger opportunities that investors are looking at, and we expect these stocks to hit these valuations before the end of the year”
When advised of the new valuation methodology, Jim Cramer was quick to chime in, “This is a fabulous way to evaluate companies, and it is going to make millions of Americans very rich”.
By Shariq Daudi