price to sales

The "price to sales" ratio (P/S ratio) is a financial metric used to evaluate a company's stock price relative to its revenue. This ratio is different from the price-to-earnings (P/E) ratio, which considers profit after expenses. Here are some key discussions on the P/S ratio shared by various experts:

1. Basic Explanation:

   • The P/S ratio is calculated by dividing the company's market capitalization by its sales or revenue over the past 12 months. This metric can be beneficial as revenue is typically more stable than earnings, making it a reliable measure of a company's financial health.
   • Unlike the P/E ratio, which can be volatile due to earnings fluctuations, the P/S ratio remains steady and offers a clearer picture of a company's value relative to its revenue1.

2. Application in Tech and DeFi:

   • The P/S ratio is especially useful in industries like technology and DeFi (Decentralized Finance) where companies might not have consistent or positive earnings. For example, many DeFi tokens are valued based on their revenue rather than profit because these protocols often focus on top-line sales rather than net profit.
   • The Bankless podcast discusses the shift from using the P/E ratio to the P/S ratio, highlighting that many DeFi tokens are evaluated based on their revenue generation and potential future earnings rather than current profitability 2.

3. Valuation Comparisons:

   • In volatile markets, particularly those with overvalued tech stocks, the P/S ratio offers an alternative means of valuation. Experts on the Animal Spirits Podcast talk about using the P/S ratio due to the lack of earnings in many tech companies, thereby providing another relative valuation metric 3.
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       1

       Comparing Apples to Oranges

       01:13:31
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       2

       Shifting from Price to Sales

       00:56:14
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       3

       Market Corrections Explained

       00:13:31
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       4

       Financial Repression Insights

       00:59:07
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       5

       Uniswap's Potential

       01:01:00

4. Historical Perspective and Forecasts:

   • Historical analysis shows that the P/S ratio can be mean-reverting, providing insights for value investors. However, it's not a perfect metric and should be used alongside other valuation tools. The optic of such ratios, especially during financial repression periods, can indicate highly inflated market valuations, as discussed on the Masters in Business podcast 4.

5. Use in DeFi Protocols:

   • Specific to DeFi, comparing the P/S ratios of different protocols helps to understand their market valuation. For instance, Uniswap is highlighted for its potential in generating revenue through protocol fees, equating its value proposition to early-stage companies like Facebook before they monetized their platform 5.

Understanding the P/S ratio and its implications in evaluating both traditional equities and emerging DeFi protocols can offer significant insights into investment decisions.