"When Does The Party End?”" - Goldman Finds Revenue Multiples Have Never Been Higher

Tyler Durden's picture

With stocks rising to record high after record high, and with even Goldman's clients now asking "When does the party end?" as noted by Goldman's David Kostin overnight, the answer is simple: nothing has changed. Specifically, between the Fed's ongoing monetization of tens of billions monthly in bonds, the missing piece to the equation is also a known one - corporate buybacks. In fact as Goldman admits, "February was the busiest month in our buyback desk’s history." (which surely is Chinese walled off from Goldman's prop trading desk). Why? Because as Reuters reported previously, this was the second-busiest week ever recorded for high-grade bond issuance. And with the use of proceeds certainly not going to capex, companies continue to buyback their shares in record amounts to mask the decline in actual cash earnings by lowering the amount of shares outstanding and thus keeping EPS rising or flat.

But aren't companies leery of buying back their shares at all time highs?

Well, not if in the process of purchasing they can get the momentum chasing algos and what little retail dumb money is left to piggyback along, and generate additional upside, which then allows companies to use their overvalued equity as M&A currency. Confirming precisely that corporations now see their stocks as the most highly valued ever, is that the share of M&A primarily paid for in stock is now at an all time high! It's ok though - nothing quite like issuing record amounts of debt (as we said would happen back in 2012) to buy back one's stock so that the same stock can hit record levels and then be used as currency to purchase other companies - as Homer Simpson would say, a "tidy little package."

And confirming just how incredulous investors are in this latest "growth stock mania" phase is that as Goldman says, it has led many investors to ask: “When does the party end?” Growth companies such as Facebook, Yelp, and Alexion Pharmaceuticals have returned more than 30% YTD and trade at high valuations that imply market expectations for strong future growth.

Goldman's punchline: the median company’s EV/sales ratio is now the highest in 35 years, surpassing even the dot com bubble.

Goldman then wonders, with the market at full valuation what amount of growth is necessary to sustain the lofty valuations and fulfill the expectations embedded in premium multiples. To answer the question, the vampire squid analyzed the historical performance of stocks across the Russell 3000, examining EV/sales ratios in order to include smaller growth companies. Its findings:

Of stocks with the highest embedded expectations, only those able to realize truly exceptional revenue growth reliably outperform. Exhibit 5 shows the median 1-, 3-, and 5-year forward returns for stocks with EV/sales ratios of 10x-15x. The median stock in this category underperforms its sector peers in most cases. For example, even stocks able to double or triple sales in a year have historically lagged by a median of 10 pp during those 12 months. Only stocks that grew revenues by more than 500% over a five year period (43% CAGR) typically outperformed, and then by less than 5 pp.


In other words, the party rarely continues for long. Shares priced to grow the fastest rarely succeed in growing into their valuations. Firms ranking in the top 10% of EV/sales ratios (typically 10x and higher), generally lag peers over 1-, 3-, and 5-year horizons, regardless of realized growth.


Many investors find the historical example surprising given its contrast with recent trends. The median Russell 3000 stock with a EV/sales ratio above 10x one year ago returned 34% during the past 12 months, outperforming the index’s median stock by 500 bp.

Not surprisingly, it is the cheap stocks that perform better in the long-run. Stocks on the other end of the distribution have historically tended to
outperform across time horizons, regardless of growth rate (Exhibit 6). The median firm with EV/sales below 0.5x typically outpaces sector peers. But who knows - after all never before has the entire stock market been a bubble of such unprecedented proportions blown willingly and knowingly by a Fed which has gone all in on its bet its record balance sheet will trickle down into the economy via the Russell 2000 "transmission mechanism", and never before has the Fed - which now in retrospect admits the 2007 market was a bubble - cast so blind an eye on the current bubble which as even Goldman admits is bigger than it ever was before.

Which then, according to Goldman, leaves investors with a choice: (1) Target the stocks priced to grow the fastest and either ride the current wave of popularity or aim to beat the historical odds by identifying the outliers; or (2) invest in stocks with low multiples and outperform as a base case, with larger returns as a bonus for identifying the firms that actually deliver the fastest growth.

In our view there is a third choice - the same we have been advocating for the past 5 years: ignore the manipulated, broken, gamed stock market entirely, in which only criminal insiders and HFT algos can and do make money on a regular basis (because remember: no "advisor" will urge you to sell just before the all time highs... or 20% below it... or 50% below it - after all it is just a BTFD opportunity), and instead keep investing (as in not gambling) in hard assets, those which the Fed can not and will not print in order to generate the impression that things are better just because 99% of the population has no clue what the difference between real and nominal, and between paper and actual gains, is.

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Groundhog Day's picture

I was gravely disappointed on Friday.  I had my 1900 spx hat on and the champaign on ice.  Instead, i had to crack open the Johnny Black and now must wait for monday or tuesday

National Blessing's picture

Goldman Sachs.  That company truly is the anti-Christ.  Bastards.

Manthong's picture

Adam Smith’s party clock has no hands.. but everyone knows that the time will be up eventually.

RaceToTheBottom's picture

"Adam Smith’s party clock"

Excellent imagery.  Thanks sir.

0b1knob's picture

The ultimate black swan / false flag event may be shaping up.   War between Libya and North Korea.   I kid you not.



TeamDepends's picture

That, sadly, makes perfect sense in this world.  After all, a flyweight bout usually precedes the heavyweight rumble, the culmination of which is when the party ends.

dontknowcrapabouteconomy's picture

Really? They are half way around the world from each other. How do you see them going at it, and where would they fight?

0b1knob's picture

What was the probablility in 1914 that a local dispute involvining Serbian autonomy would draw all the major powers of Europe into a world war?

Groundhog Day's picture

What is Goldman fuckin up to.  They have been releasing a lot of negative articles lately which can only mean one thing....big rally coming

css1971's picture

Nah. They're setting the scene. They're already positioned for the down side.

yogibear's picture

As long as the Federal Reserve keeps supplying the drugs and booze the party continues or until those  partying die of organ failure.

Stuck on Zero's picture

So true.  The flip side of:

"Revenue Multiples Have Never Been Higher"


"Interest Rates Have Never Been So Low"


Midas's picture

Am I to conclude that Facebook didn't get a good deal on WhatsAPP?

css1971's picture

What would you expect from a company run by idiots and for idiots?

ChargingHandle's picture

Great analysis. Thanks

q99x2's picture

Pretty good article. If it keeps going long enough everything will be the same thing and I think it is a black hole.

Eeyores Enigma's picture

REAL economic growth requires cheap almost free energy and other natural resources and an environment that can absorb the massive waste stream thereby created, plus easy credit.

When the first two elements are constrained you cant just ramp up the third and expect REAL growth. 

What you get is exponential inequality, global violence, then collapse.


css1971's picture

What you're saying basically is, it's time to get off the planet.

Mars, asteroid belt, the moon etc.

oklaboy's picture

and what hard assets? name as few not manipulated?  

Tyler Durden's picture

Gold certainly is manipulated in fiat terms. Lower. Does that make it more or less affordable?

zorba THE GREEK's picture

Even with blatant gold price manipulation, it has managed to close higher each week.

How much gold are they willing to borrow from GLD to short the market when it is having

less and less effect on gold prices?  I guess we will soon find out.

lasvegaspersona's picture


I think you are assuming that physical gold plays a role in pricing gold...it does not...not at all.

The majority of 'gold', by far, is traded as XAU on the Forex market. They trade 10 times the value of GLD daily.

To control the POG, derivatives work much better than actually touching the stuff.

Gold will remain at near the cost of production until the world abandons the dollar and seeks an agreeable reserve....which has always been gold. For it to be anything else....China, Russia, Japan, the USA, Oil and the EZ would all have to join hands and sing campfire and old Cat Stevens songs together. (and that is the only way SDRs could ever become accepted...universal agreement. The last universal agreement was at Bretton Woods when the last man standing made the rules. Absent a WW it won't happen again).

turnoffthewater's picture

"How much gold are they willing to borrow from GLD to short the market". If history has any bearing, they will probably need alot. Well, from page 86 of Dimitri Speck's book The Gold Cartel, there's this eye popping quote that was once common place knowledge about efforts to stem spiralling inflation in 1979: As Time magazine explains: Volcker . . . drafts plans for what could be the second massive dollar-rescue program the US has had t o mount in eleven months. Among the steps under discussion: LARGER GOLD SALES. The 750,000 oz. of Fort Knox bullion the US now sells monthly might be doubled, in hopes that this might drive prices down. Please read that a second time and note that the capitalization is in the original, not added by me for emphasis. (Incidentally, 750,000 ounces is 25.7 tons . . . a month)It's from a Time freaking magazine issue dated 15 October 1979. So, here you are in 2014 trying to get your family and friends to listen to you that gold and silver markets are rigged and they won't go for it. What's with that conspiracy stuff?! But back in 1979 people waiting in doctors' offices and dentists' office were yawning as they read about how the Fed was selling 750,000 ounces of gold from Fort Knox into the market every month to try to halt the rise of gold prices. Speck's book is not as easy to read as Gold Wars by Ferdinand Lips but it has some terrific information in it.

Just sayin

the question's picture

I sometimes wonder if the TPTB know 100% the fiat system is dying. And so they manipulate gold lower so the average person can afford to buy it. A lot of it. Many would call this naive. But perhaps they are providing this as a lifeboat for citizens to avoid complete and total financial ruin, homelessness, starvation and death.

the question's picture

"...too kind."

+1 for using a euphemism where others may have resorted to insults!

css1971's picture

Certainly. Makes perfect sense.

Then again the average person they know is in the 0.01%.

sunny's picture

I've wondered why the markets keep drifting higher and higher.  This actually makes a lot of sense.  Thank you.  Next question.  When will the party end....  Just curious.

Johnny Cocknballs's picture

Well you know they aren't drifting higher and higher because of the underlying fundamentals of either the national economy or, with some exceptions, the corporations themselves. 

You also know that in no small part is the party really backed by printing, on top of Bretton Woods/Petrodollar regime which is crumbling anyway {and the  Indians, China and Russia together, can and might act to further weaken the dollar}.

You also know that while the real money is always in volatility... the name of the game is getting out of fiat and into genuine assets.  Gold, sure, but mines and arable land and apartment complexes and nursing homes and start ups etc. 

printing props up treasuries, which dont pay anything, which prop up stocks, and I don't know much about the buybacks generally, but think Apple's was a good move {one of the handful of issues I'm in a respectful minority about here - I love Apple, but I also love HTC. A lot.}...


This is a long winded way of saying I don't know when the party will end but it clearly must, but many people are tired of the doom porn and theorize that things could chug along for many years, into decades. 


I doubt it, this is a spinning plates that is beginning to wobble.  Africa remains relatively unraped and relatively undeveloped.  Obviously China has a head start there, but I'd anticipate both signifcabtly more cash and US made weapons flowing into Africa, also regardless, but that might suddenly accelerate if/when the Ukraine shit show really gets started.



xamax's picture

Blablbla.... I expect also this year 30% return on S&P, there is no alternative to stocks.

Carl Popper's picture

I don't see a hard limit soon to EV/sales acceleration.  


Big data and machines are cheap compared to humans who are whiny and sometimes don't show up to work, never work at peak efficiency, and humans want things like wages and benefits and shit.  Fuck humans. 


When all production and most services are fully automated then we achieve nirvana and Dow 36,000

xamax's picture

Made a killing with TSLA and NFLX, no reason it continues the same way as long as rates stay low.

fooledbyfiat's picture

Damn dedicated readers of ZH... addiction levels so high that this post has managed 2000+ reads in a limited time

Carl Popper's picture

If I go an hour without checking zero hedge I go thru some serious withdrawal. 

Orly's picture

I am so glad I don't have to kill for this great information and analysis.

Now I know where to put my 403 money after TSHTF.

It goes without saying but someone should do it:

Thank you ZeroHedge, once again!  Tyler, you're the shit.


El Hosel's picture

Yet another all time high....Suprise.

Orly's picture

I am leery because the technicals put the market at 1929 (some irony in that number as there was in 666...).  That means USDJPY to ~112 and ten year yields hovering just above three percent, which would crush any "nascent" growth.

Maybe that's when TSHTF.  How long these market perversions can sustain themselves without consequences is anyone's guess.


trustee's picture

Markets go up and down people..Sometimes they overshoot heavily to the downside....sometimes to the upside...Stop trying to predict tops and bottoms. Stop blaming the fed and everyone else for your inabiliities..Hold a diversified pool of assets and stop bitching. Its a losing game :)

Blankenstein's picture


"Stop blaming the fed and everyone else for your inabiliities."


You mean like the inability to stack the deck like the squid and get away with it (pay a relatively small fine - just a cost of doing business).


"The SEC sued Goldman and Mr. Tourre, then a vice president, in April 2010, alleging they misled investors on a collateralized-debt obligation called Abacus 2007-AC1that produced big losses for investors and big gains for hedge-fund firm Paulson & Co. A collateralized-debt obligation, or CDO, pools loans, such as subprime mortgages, with slices of the security sold to investor"


"During the call, the Goldman saleswoman told the ACA executive that Goldman was "placing a hundred percent of the equity" on Abacus with Paulson & Co., according to court papers. Such a position implies that Paulson was betting the CDO would increase in value. In fact, the SEC argues, Mr. Tourre knew Paulson intended to bet the CDO would fall in value. Representatives for ACA and Paulson declined to comment."




 But on August 1st a jury in a Manhattan federal court found him liable on six counts of securities fraud—including one of “aiding and abetting” his former employer, Goldman Sachs. This means that a jury has found that the world’s most successful investment bank has done something wrong—and that the case may be far from over.

"misleading investors about a complex security, called Abacus, which caused three financial firms to lose $1 billion"


The Econ Ideal's picture

Cheap rates drive Ponzi finance...

buzzsaw99's picture

it will never end. monday will be the same only moar so

lasvegaspersona's picture

In medical literature you can't use an abreviation unless you define it in it's first use in the article. This is true even for very common terms like complete blood count (CBC). In articles meant to educate or convince I'd like to see more of this. I should not have to search for enterprise value (EV). I suspect laziness and wanting to seem 'hip to the jargon' will over rule 'ease of reading' 'wanting to educate' however.

Implicit simplicit's picture

Good point. I just guessed and thought it was "Earnings Valuation", like projocted earnings, which would also make sense.

css1971's picture

No. You forget, the financial sector survives on misdirection, evasion and fraud. Without the first two, the third becomes difficult so it is in their interest to make terms as obscure as possible.

Having said that, things like enterprise value are very commonly used and abbreviated, on a financial site you could be expected to understand them or be able to google when not.

andrewp111's picture

The first graph doesn't quite go back to the dot com bubble. I would like to see that graph on the same x scale as the second one.  I wouldn't worry too much about the Fed-pumped bubble until all ratios exceed those in March 2000. This bull has room to run!

enloe creek's picture

there is also a productivity bubble. the productivity is being goosed by cutting expenses and it will backfire way above the ability of companies to recover from the effects.  maintainance  is not being done or training . some capital spending is wasted on sub par junk that doesn't produce the results. there is a very real fnger of the United States manufacturing system going under an never regaining its competitiveness during a downturn. many older workers are just going through the motions waiting on a retirement they think will be there while the new people are so distracted and uninterested that they can't be trained  it is a final run in manufacturing that will shock the nation in a few years as foriegn companies take ove all production.  the big three are toast and the companies that supply them will be as well.