Valuation methods significant different between US and Taiwan investors

valuation method

Let me start with the conclusion. The valuation method of U.S. stock investors is mainly based on the Price-to-Sales Ratio (P/S or PSR). It also talks about the P/E ratio, but it does not pay as much attention to the price-to-sales ratio (please note that I mean relatively speaking, the PE ratio is of course very important, especially for mature and stable companies, the importance is irreplaceable). Investors in Taiwan stocks are more obsessed with P/E (Pirce-to-earning per sale) and hardly talk about price-to-earnings ratios.

These two completely different valuation methods and the degree of emphasis have caused many differences in the focus of US and Taiwan stocks financial reports, investor mentality, holding time, acceptance of startups, and the possibility of stock price explosions.

To name one of the biggest differences, I suggest you refer to my other blog post “Rule 40, perfect for SaaS companies“.

valuation method
Credit: vikingmergers.com

Financial report focus

I mentioned the importance of revenue to all companies and its irreplaceability on section 4-2 of my book “The Rules of Super Growth Stocks Investing”, because basically only this number in the financial report is true and credible, and the rest figures can be adjusted “legally” through financial engineering and accounting techniques ─ Investors must always remember this sentence.

This is why investors in US stocks, represented by Wall Street, almost always use quarterly revenue growth rate to determine the main indicator of the health of the company’s operations. Based on this, the stock P/S (price-to-sales) ratio is compared with different companies in the same industry.

On the other hand, investors in Taiwan stocks are extremely concerned about the company’s earnings per share (EPS). Almost all the analysis reports they see are based on the earnings per share multiplied by the multiples of individual industries to directly get a reasonable estimate of the company value.

Acceptance of startups

Because investors in Taiwan stocks attach great importance to the company’s earnings per share, it is almost impossible for startups or unicorns with no earnings to survive in Taiwan stock market. Of course, this is only one of the reasons. Another reason is that startups or unicorns without earnings cannot pass the strict listing regulations of Taiwan stocks, and it is impossible for them to pass the audit. This is also the main reason why Appier, a rare Taiwanese software unicorn, went public in Japan (there are also many electronics companies that went to the US stock market for the same reason).

And what about U.S. stocks? There is no requirement that companies with no earnings cannot be listed. On the contrary, we have seen that almost all companies listed in recent years have no earnings . These companies originally wanted to repay the funds of early investors by going public. This is a matter of course in US stocks.

Possibility of stock price explosion

There is no limit on the rise and fall of US stocks (but there are circuit breakers), and the response to business operations and prospects is immediate and complete, without any reservations. The U.S. stock market will not be like Taiwan stocks where there is a continuous rise and fall limit for several days, which is worrying for several days (10% up or down at most for any stocks daily). When there is major news, it will immediately reflect the full rise or fall by the amount it should be.

In addition, usually well-run and promising technology companies are unlikely to have an earnings in the first few years, because they need a lot of capital investment to expand, and because in the early stage of full development, the revenue growth rate will be quite large; if it is listed companies will be immediately reflected in the stock price. On the contrary, mature companies, because they have passed the growth burst period, generally do not need capital expansion, but because of this, the growth of revenue is limited, which is reflected in the stock price and of course underperformed.

In Taiwan stocks, we do not see such a possibility.

Investor mentality and length of holding period

Based on the above differences, investors in Taiwan stock market usually have a very low tolerance for the company’s losses, and they even regard it as a scourge. When they see that the company has no earnings, they don’t go into the cause. Most retail investors will immediately change their minds and sell stocks immediately. Abandon it like a mess.

But if in the U.S. stock market, many of the current technology giants have had no earnings for a long time (nearly ten years), but if U.S. stock investors are long-term investors, the judgment is correct, the good days of these good companies will lie ahead. I just give you a bunch of examples: Netflix (ticker: NFLX), Tesla (ticker: TSLA), Amazon.com (ticker: AMZN), and Salesforce.com (ticker: CRM) have all suffered losses for nearly a decade.

There are no advantages or disadvantages to valuation methods, only whether they are suitable or not. As I said on section 5-1 of my book “The Rules of Super Growth Stocks Investing”, investors should not use only one valuation method. There are only advantages and no disadvantages to using multiple valuation methods. It is certain that it will spend a lot of attention, because that is your hard-earned money.

The most fundamental reason

Finally, the most fundamental reason for the difference in this phenomenon is that ─ US-listed companies are the source of revenue and orders for Taiwan-listed companies. As a result, Taiwan-listed companies can only switch focus on cost-profit margins and net profits (vs. revenue controlled by US companies). It does not make much sense to talk about revenue growth, because basically Taiwan-listed companies do not have self-control rights on their destiny; this is what I wrote in the book “The Rules of Super Growth Stocks Investing”, the content on section 1-6.

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