Valuation Question: Multiples
I have a question that I’m hoping to get clarification on regarding the valuation of public companies
I’m looking at a company that is currently trading way higher than its peers. Median EV/EBITDA among peers is around 6x. But this company is trading around 13x (it’s growing really fast and disrupting the space). Precedent transaction are all around 7-8x multiples
Would multiples analysis and precedent transactions be useless in this case? Because if I apply a 7x multiple to this company’s EBITDA, the valuation would be significantly less than its current market cap.. which wouldn’t make sense
What do you do in this case? Just do a DCF?
You don’t always have to say that it needs to trade at the median of your comps set. You could say that it deserves to trade, for example, at the 3rd quartile of the comps set because it is a better company for the reasons you listed above.
Exactly. You can use a variety of percentiles as long as you can justify it.
I.e. If you're analyzing a top company in the industry that has many advantages over its peers, you'd use the 3rd quartile/4th quintile rather than the median.
You can also build the case for a shitty company but well, it depends on the situation
there are various reasons to trade at a premium. things will likely converge to a tighter band if you look at forward multiples several years out (assuming there is analyst ebitda forecasts available).
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