Relative valuation: multiples, comps, and market signals

# Relative valuation: multiples, comps, and market signals

On January 20, 2022, Netflix closed at $508 per share, trading at roughly 8.5x forward sales and 45x forward earnings. Six months later, it traded at $174, a 66% drawdown that eventually bottomed near $166 in May. The company's revenue had grown. Its subscriber base, after one bad quarter, was recovering. EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → margins were intact. Yet $200 billion of market capitalization had evaporated.

Nothing fundamental had broken. What broke was the *multiple*. And if you can't explain to your board why a healthy business can lose two-thirds of its value in a quarter without missing a number, you don't actually understand relative valuation, you just know the formulas.

This lesson is about closing that gap.

Why multiples are the lingua franca of capital markets

Discounted cash flowDiscounted cash flowDiscounted Cash Flow (DCF) is a valuation method that estimates an asset's value by projecting future cash flows and discounting them to present value using a required rate of return.View full definition → models are intellectually honest and operationally useless in a deal room. When a banker calls at 7 a.m. about a take-private opportunity, no one builds a 10-year DCFDCFDiscounted Cash Flow (DCF) is a valuation method that estimates an asset's value by projecting future cash flows and discounting them to present value using a required rate of return.View full definition → before lunch. They pull comps. They benchmark. They speak in multiples, because multiples compress an enormous amount of information (growth, margins, capital intensity, risk, sentiment) into a single number that can be argued about in a 20-minute meeting.

The three workhorse multiples every CFO must master:

• EV/EBITDA, the standard for mature businesses, M&A, and LBO underwriting. It strips out capital structure and tax jurisdiction differences, which matters enormously under OECD Pillar Two's 15% global minimum tax now in full effect across most G20 economies.
• P/E, the public market's default. Useful for stable earners, useless for anything pre-profitability, distorted by buybacks, and increasingly noisy under IFRS 16 lease accounting where reported earnings have shifted meaningfully versus pre-2019 comparables.
• EV/Sales, the multiple of last resort for unprofitable companies, and the multiple of *first* resort for SaaS and high-growth tech. Its weakness is obvious: it assumes you'll eventually earn a margin. Its strength is that it's hard to manipulate.

The hidden adjustments that separate amateurs from professionals

A clean multiple requires a clean numerator and denominator. Most aren't. Here's what a serious CFO checks before quoting a comp:

1. Lease-adjusted EV. Post-IFRS 16, operating leases sit on the balance sheet as right-of-use assets and lease liabilities. Some analysts include lease liabilities in EV; some don't. If your comp set mixes the two, your multiple is garbage. For retailers and airlines, this can move EV/EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → by 2-3 turns.

2. Stock-based compensation. Pre-2022, tech analysts cheerfully added back SBC to compute "adjusted EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition →." Post-rerating, the buy side largely stopped. When Snowflake or Palantir quote adjusted figures, institutional investors now haircut them. As a CFO, decide which convention you're using and disclose it.

3. Pillar Two distortions on P/E. Companies that historically benefited from low-tax jurisdictions (Irish-domiciled pharma, Singapore-routed tech) are now seeing effective tax rates normalize toward 15%+. Trailing P/E looks artificially low; forward P/E tells a different story. Always quote forward.

The tech re-rating of 2022: a master class in multiple compression

Return to Netflix. In late 2021, the stock traded at roughly 45x forward earnings. The 10-year Treasury yielded 1.5%. By October 2022, the 10-year hit 4.2%. Mechanically, the present value of distant cash flows, and Netflix was very much a "distant cash flow" story, collapsed.

Here's the math executives often miss: a stock trading at 45x earnings is implicitly saying that earnings growth justifies discounting those earnings at a low rate. Raise the discount rate by 250 basis points, and the appropriate multiple doesn't fall by 250 basis points, it can fall by half or more, because the duration of those cash flows acts like bond duration. Long-duration equities behave like 30-year zero-coupon bonds. They got crushed exactly the same way.

Netflix re-rated from ~45x to ~17x forward earnings at the trough. That compression, not earnings deterioration, accounted for the bulk of the drawdown. Spencer Neumann, Netflix's CFO, didn't miss a single guidance number that mattered structurally. The market simply changed the price it was willing to pay for the same dollar of future profit.

The same story, different tickers

• Meta fell from $384 (Sept 2021) to $88 (Nov 2022), a 77% drop. Susan Li (then VPVPA clear statement of the benefits your product delivers, the problems it solves and why customers should choose you over alternatives.View full definition → Finance, now CFO) inherited a company whose ad revenue had softened modestly but whose multiple had collapsed from ~24x to ~11x earnings. Meta then rebounded above $600 by 2024 as the multiple re-expanded on AI optimism.
• Shopify went from 40x sales to 8x sales in nine months. Revenue kept growing. The business model didn't change. The risk-free rate did.
• Zoom, the poster child, fell from $559 to $60. Some of this was earnings (post-COVID normalization), but the multiple went from 35x EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → to under 10x.

The lesson for CFOs: your multiple is a function of macro conditions you don't control, peer behavior you partly influence, and a narrative you absolutely must manage. Confusing these three is how value gets destroyed in IR meetings.

Building a defensible comp set

The single most common mistake, and the one bankers exploit when they're selling you a deal, is a lazy comp set. The rules:

1. Business model congruence beats industry labels. Spotify is not a comp for Warner Music, even though both are "music." One is a distribution platform with negative working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → and content licensing costs; the other owns IP with recurring royalties. Their multiples should diverge, and do.

2. Size matters more than you think. Sub-$1B market cap companies trade at structural discounts to large caps in the same sector, often 20-30%. Don't blend them.

3. Growth-adjusted multiples beat raw multiples. EV/EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → divided by growth (the "EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → PEG") normalizes for the fact that a 4% grower and a 25% grower should never trade at the same multiple. If your comp set's average EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms. growth is 8% and you're growing at 18%, you deserve a premium, quantify it.

4. Always show median, not mean. One outlier (an acquisition target trading on rumor, or a distressed comp) can shift a mean multiple by 3+ turns.

From comps to market signals: reading what multiples are really telling you

A multiple is a price. A price is information. The advanced practice of relative valuation is treating the multiple itself as a *signal*, about market expectations, peer positioningpositioningThe mental space you want your brand to occupy in your target customer's mind relative to alternatives.View full definition →, and your own credibility.

Three signals every CFO should track weekly

Signal 1: The multiple gap to your closest peer. If you're a software CFO and your nearest comparable trades at 12x revenue while you trade at 7x, the market is telling you something. It's either a growth discount, a margin discount, a governance discount, or a narrative discount. Adobe traded at a persistent premium to Salesforce throughout 2023-2024 not because its growth was higher (it wasn't) but because its FCFFCFFree Cash Flow is the cash a company generates from operations after funding the capital expenditures needed to maintain and grow its asset base.View full definition → conversion was cleaner. Marc Garrett, finance executives across the SaaS sector took notes.