Growth Adjusted Enterprise Value to Revenue Multiple (ERG)

Live from Schenectady, New York, it's SAS Talk with the Metric Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and author of Kellogg.

And together we are the Metrics Brothers.

We go together just like ham and eggs, Ray.

Dave, you're making me hungry with your introduction. So let's move to what's on tap for today.

All right. So last week we did 5 metrics predictions for 2024. And the last prediction on that list of kind of hot metrics was the ERG ratio.

That must have taken a lot of energy, Dave.

Ouch. Ouch. No, not much at all, Ray. In fact, 10 million ERGs per second is 1 watt.

Oh my God, I got to go get my Tesla manual out. But let's go back to ERG, the acronym here in the B2B SaaS and cloud industry, which stands for Enterprise Value to Revenue to Growth Ratio.

Yes, it does, Ray. Most people don't call it that yet, as we'll discuss. But why don't we jump in today's episode and we'll talk about both the metric and the name.

Well, since I believe you coined the ERG ratio, I'm going to let you start with What the heck is it?

Sure. So the ERG, what I call the ERG ratio and what I hope the industry will one day call the ERG ratio is also known as the growth-adjusted enterprise value to revenue multiple. So let's talk about where it comes from. I think most people who listen will be familiar with the enterprise value to revenue multiple, which takes the enterprise value of company, effectively its market cap minus cash and adjusted for debt. Divides it by revenue and you get a multiple. Like Workday today has the 8.4 multiple, meaning it's trading for 8.4 times its revenue. Now you then take that multiple for Workday, 8.4, and you divide it by the growth rate. In the case of Workday, it's 17% growth rate. I'm going to convert that to a number by multiplying by 100. So I take 8.4 divided by 17 and I get 0.49. So Workday's ERG ratio using recent data from Meritech is 0.49. Okay.

So I get how you got to 0.49, but is 0.49 good, bad? And where is it on the scale of goodness?

Yeah, this is a tricky ratio, but I think it's hard to put in English because what I want to say is it's about whether a stock might be kind of cheap relative to its growth. Whether it's kind of cheap or expensive relative to its growth is the way I think of it. Sometimes I think of it as whether Wall Street likes the stock, but some people use enterprise value to revenue for that kind of notion of like. But to me, it's kind of a growth-adjusted, does Wall Street like the stock? Which in English means, is this stock potentially cheap or expensive given its growth rate?

Yeah, I think it's gonna make a lot more sense once we give a few examples a little bit later in the episode. So everyone stay tuned. But because when I heard you called ERG, it's like, I think I saw something on another post, like maybe it was Clouded Judgment. Are there other names that goes by, Dave?

Yeah. Yeah. So this, this is called in long form, the growth adjusted enterprise value to revenue multiple. My name is ERG, which is just enterprise value, the E divided by revenue divided by growth, E-R-G, ERG. So, but, but for example, Jemim Ball at Altimeter talks about it in his blog, Clouded Judgment. He puts a fair amount of focus on it. You'll also see it in Meritech Public Comps. They talk about it as well. And both of them call it growth-adjusted enterprise value to revenue multiple.

Well, you know what? I just gotta tell you, Dave, thank you for naming a metric after me, Ray Growth Reich. And it's actually going to be growth-adjusted in my spirit. Thank you.

Yeah, the Ray-adjusted enterprise value multiple. So look, the way I got this name, right, was there's an old book called One Up on Wall Street by Peter Lynch, the guy who ran Fidelity Magellan for years. And he was the person, the first person who introduced me to growth-adjusted multiples. And in his case, he used a price-to-earnings multiple. So say a typical stock, which is normal for the S&P 500, is trading at 15 times earnings and say it was growing at 15%. So you take 15, divide by 15, 15 and get 1. So its PEG ratio, or its price-to-earnings growth ratio, or if you wanted to call it its growth-adjusted price-to-earnings ratio, would be 1. And basically this was a measure of kind of whether the stock was overvalued, is the way I always thought of it, which is that if the PEG is above the market, the stock is getting expensive. If the PEG is below the market, it's getting cheaper. And let's just pretend the market was at 1. So, so say that the S&P 500 was trading for 15, It was growing at 15%. So it was kind of a, is this stock cheap for its growth metric? And literally in the old days, we used to call, I mean, enterprise value to revenue is roughly what we used to call the price to sales ratio, which is the price of the stock divided by the sales per share. With the exception of adjusting for cash, it's the same ratio. One just does it in aggregate. What's the value of all the shares and what's all the revenue? And one does it on a per share basis. So you could easily call this the PSG ratio as well. The price to sales to growth ratio, if you're looking at it on a per share basis.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grooth-Rite have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @Kellogg and Ray on LinkedIn @RayReich. Thank you so much for listening to the Metrics Brothers podcast. Hey Dave, I gotta ask this question because I, I don't consider myself the most sophisticated retail investor, but do most analysts still use the PEG ratio today for non-technology stocks to help with Whether it's expensive or not?

So in point of fact, I don't know, 'cause I try not to trade outside of tech 'cause I get my clock cleaned. So I buy ETFs outside of tech. I would guess the answer to that question is yes. And by the way, for the operators on this call who are hopefully also individual or personal investors, this is clearly an investor metric, right? This is not, not, not an operator metric. And by the way, this is not investor advice. We don't give advice. And per disclaimer, even if we did, it would Probably be wrong. We're here to teach people about metrics, and to me, this is an interesting one.

Well, so let's talk a little bit about what it does measure. And by the way, I should have double-clicked on what you just said, because if anybody has not listened to the disclaimer at the end of SAS Talk with the Metrics Brothers, it's one of the best endings I've ever heard. And I got to give credit to my brother here, Dave Kellogg. But it talks about how our wives probably don't think it's good advice either, Dave.

Yes. I love that. Indeed. There's a bunch in there. I won't steal it. Listen to it. End of the episode and keep listening.

So, you know, what's interesting about this is, you know, we talk about enterprise value to next 12 months revenue, right? That's the multiple we use for B2B tech stocks under like price earnings. And now you're trying to growth adjust what I think is a fairly already generous model by the growth rate. So tell me a little bit about an example company and how this looks with an example company.

Sure. So let's look at HubSpot. And if you do the standard analysis that people in tech do, they look at HubSpot and say, oh, what's its enterprise value? How much is its revenue? They divide the first by the second and they'd see that HubSpot is trading at 11.5x. And that, given that the median today is 6.2x for EV-to-AR multiple, you might say that HubSpot is expensive, right? You say, wow, the median stock trades at 6 and HubSpot's trading at 11. Gosh, that's an expensive stock. And that's why this ratio needs to exist because somebody will then say, but wait a minute, Ray, HubSpot's growing a lot faster than the median company. The median company of the select companies I randomly grabbed off Meritech is 21%. That's their growth. Actually, I think that's the overall Meritech median is 21% growth. So it's trading at 6x, but it's only growing at 20%. HubSpot is growing at 26%. Ah, interesting. In this case, So HubSpot is growing just a bit faster, 26 as opposed to 21. So yes, it's expensive, but not maybe as expensive as it looks because it's growing that much faster than the median. And the way to look at this is look at the ERG ratio. HubSpot's ERG is 0.44. The median is 0.31. So you can see, yeah, it's expensive, but, but maybe not quite as expensive as you thought. And by the way, It's cheaper than Workday 'cause Workday is growing at 8.4x. Okay, that's less than HubSpot, but Workday is also growing slower than HubSpot. It's growing at 17% for an ERG of 0.49.

Well, let's look at a couple others. And I love the fact that, you know, we use spreadsheets all the time and you actually did all these calculations. So I look at Klaviyo, one of the hot, you know, IPOs of 2023. And when you look at their ERG, It's very low. It's 0.17, but the revenue growth is 54% and their enterprise value to revenue multiple is 9.4. So does that make this stock appear cheaper than some of their brothers?

Yeah. So Klaviyo is an interesting example because I read that S-1 and I thought Klaviyo was an amazing company. And somehow the stock has not done particularly well in the stock market, um, last I checked. So what you see here though, and this is pretty fresh data, is that Klaviyo is currently trading at 9.4 times revenue, but it's growing at 54%. So this thing's growing like a weed, and that drives its ERG ratio down to 0.17. So the way I'd interpret that number, Ray, is I would say, gosh, at 9.4 times revenues, Klaviyo looks expensive compared to other companies. But when you growth adjust it, it's actually the cheapest on my kind of randomly selected list of about 20 companies trading at 0.17. So what it means— yeah, what it means to me is it's a pretend— it's bargain basement, right? And you're like, okay, for its growth, this is a bargain basement stock. And then that begs the question, why? Because sometimes when you're in the bargain basement, you find great deals, and sometimes you find stocks, you know, socks with 6 toes. And I don't know which it is here, and I'm actually a little bit mystified by it.

Well, what's interesting is if you look at the next lowest ERG score, it's Twilio. But Twilio's, their enterprise value to revenue model is only 2.6 and their growth rate is much lower than the median, 13%. So it looks like one high flyer has got the lowest ERG and the next one, not such a high flyer, has got the second lowest ERG. So it's a little confusing to me.

Yeah. So Twilio, look, it's trading currently at 2.6 times revenue. Which you might say, oh my gosh, that's really low, right? The median is 6.2, they're at 2.6. So Twilio looks really cheap as a stock. And then you say, well, well, when I growth adjust it, it's growing at 13%, which isn't bad compared to the median of 21. So its ERG is 0.2. So again, Twilio looks cheap. I think in this case it's 'cause they're in the doghouse. I don't totally understand why. I mean, they were clearly such a high flyer during the pandemic era.

Yeah.

I don't know, maybe it's consumption pricing. I'm not exactly sure. Maybe it's new competitors at lower prices. Maybe it's gross margins. I'm not sure what's doing it, but Twilio looks cheap. Again, we're in the bargain basement. We just found Twilio in one of those drawers full of socks. And now we can say this looks cheap. We gotta figure out why. The next one up, Ray, I think is super interesting, which is Domo, which is the, of the 20 companies I picked, the lowest enterprise value to revenue multiple at 1.3. which is crazy. Think about that. Like, I worked at Ingress and we sold for about 1x revenues on a fire sale to CA, you know, in the early 1990s. So 2.3, I mean, it's higher than 1x, but we were perpetual license. We weren't even SaaS. So this is a very, very low multiple for a SaaS company, but they're only growing at 6%. But given how low their multiple is, their ERGA is up at 0.22, which means again, it's in the bargain basement. In this case, I think I know why. 'Cause there's a lot of questions about the company and its management. Not sure about that. But Domo to me, I did a blog post right around their IPO. It's always been kind of a rather sketch company in my opinion. And it took Wall Street a while to figure it out. But right now Domo's in the bargain basement. So if you believe in the future, you can buy the shares. I mean, at 1.3 times revenue, it's really, really cheap.

Okay, well, I'm not a big Filene's Basement shopper. And boy, that's a reference back to retail in the 1980s. But now let's go to the penthouse. That's where I like to hang out, Dave. And the penthouse, as measured by the highest ERG score, is C3 AI. And their growth rate is 6%, just like Domo, but their enterprise value to revenue multiple is 10.7. So why does Wall Street like that? I know we're not here to give advice or be analysts, but it's amazing the two ends of this story.

Yeah, this is why this is a fun metric, because it has the exact same growth as Domo at 6%. But Domo is trading for 1.3 times revenues and C3 is trading for 10.7 times revenues. So 8 times more expensive about on an EV-to-R ratio. And that's what drives the ERGA up in C3's case to 1.78. So in my opinion, C3 looks very expensive relative to its growth. And the question is why? And we can say, gosh, Wall Street seems to like this stock. Just looking at EV-to-R, it's trading at 10.7 above the median of 6.2. So they seem to like it. And if you think the answer is because they're growing fast, that's the one thing I can tell you is not true. Maybe forecasted future growth is fast, but I think the reason they like C3, to be honest, is it's kind of seen as an AI play. AI is seen as the future. They position strongly around AI. But look, this is not a cheap stock given its growth. I'd say it's not cheap given its enterprise value to revenue multiple at 10.7. And it's definitely not cheap given the very slow growth of 6% and that ERG of 1.78. So, so if you're buying the stock at these prices, it's because you think that growth is going to go up, uh, in the future. I think that's the only explanation I would have.

Yeah, I love the fact that you did all these because somebody very close to C3 is Veeva, and they have a 9.6 enterprise value to revenue model. They're only growing at 11%, so just about half of the median. And they're at a 0.87 ERG, so the second highest ERG score. So there's something Wall Street loves about Veeva too.

Yeah, true. I mean, people, I think Wall Street's always liked Veeva because of the strong vertical focus. They kind of proved out vertical SaaS. So they have a very strong position in their market. I think they're extremely hard to displace. So I'm guessing that's what's accounting for the high ERG there. Historically, they've been a stronger grower. The growth has slowed down. Ray, we didn't actually talk about the Main Street, which is the median. So let's go back and talk about that. So the median is 0.31 for the ERG ratio. So in English, because the thing I dislike about this metric is it's not intuitive at all. I thought PEG just by mathematical accident was quite intuitive. Oh, it's above 1, you're kind of paying maybe too much for the stock. It's expensive relative to growth. If it's below 1, it's cheap relative to growth. And it just was an accident that that worked out for PEG that way. For ERG, That inflection point is around 0.31 today. So in English, i.e., the median ERG is 0.31, so about a third. So it means that your enterprise value to revenue multiples at median is about one-third your growth rate, right? So what does that mean? It means that the median is 6-point, you know, 6-something times revenue and a growth rate of 21%. We're gonna convert that 21% to a number, so 21.

Okay.

6 divided by 21 is around 0.3. So it says your EV to R divided by revenue is about a third. So that's the rule of thumb you can use, at least in today's market, to say whether a stock, given its growth, looks cheaper or it looks more expensive.

Yeah, I don't want to conflate multiple discussions we've had, but when we talked about the 5 predictions in last episode, we talked about the emergence of a new metric called the Rule of X. And I know we're going to double-click on that, In next week's episode. But that the growth weight adjusted, it seems that there's going to be some impact of investor momentum, i.e., sometimes they're willing to pay up a lot more for growth. So I would think that 0.31 median, as we see growth becoming more and more in favor again, we're going to see that median for ERG go up, right?

Uh, I don't know about that. That I'm not Okay. The price-to-earnings growth one, I can kind of get almost mathematically. This one, I would just say the 0.31 is how things shake out today. I haven't looked at it historically. It'd be interesting to look at that, Ray. So, so short answer to your question is I don't know, but it's a good question. Uh, all I could tell you is right now 0.31 is the median and I don't, I don't think it's going to go up, but you know, when you were talking, Ray, the company you brought to mind was ServiceNow, because you're saying sometimes people really want to pay up. And there's a good example. ServiceNow is trading at 13.4 times revenues, which is a high valuation, right? Double the median. Their growth is only 22%. So their ERG is 0.61, which is double the median, which means that stock is kind of expensive relative to its growth rate. But I think for ServiceNow, it's pretty clear why, like excellent management, good strategy, phenomenal execution track record, right? Wall Street, in my opinion, loves that stock and for good reason, right? There's this whole They're not going to let you down aspect that also commands a premium on Wall Street, right? ServiceNow, I think, is a steady eddy stock and they kind of, what's the expression? Beat and raise. I think they do a lot of beat and raise. Not sure about that because I don't track it that closely, but that's why I'm guessing that they kind of have this 0.61. And it's not because the multiple has changed over time. It's just because it's an outstanding company. And therefore people are willing to pay more for the stock given its growth.

I'm gonna shout out, I think it's the Bill McDermott effect.

Yeah, basically.

Okay, big fan. So one of the things on the details I wanted to make sure we really cover here before we wrap up for today is enterprise value to revenue multiples. That's typically done on a next 12 months forward-looking revenue, while revenue growth is often done on what's happened the last 12 months. Does that factor into how we should look at this metric at all?

Yeah, you'll see this on the Rule of X too. And this is why I like to talk about the concept revenue divided by growth. Devil's in the detail, which is, wait a minute, which revenue? Last 12 months revenue? Some people do run rate, i.e., 4 times the current quarter, pretty rare. Most people do next 12 months revenue, right? So it's weird because you're comparing a backward-looking growth rate, right? Which is you're not using a forecasted growth rate. You're saying, hey, right now we're growing at 25% relative to last year. That's our growth rate. But then let's go apply math to a revenue figure that's forecasted. So I would say it's a little confusing. I think Meritech, where I got this data, does backward growth, forward revenue. The main thing I'd say for our listeners is make sure you know which one you're looking at. Whenever you talk about an EV to R revenue, an EV-to-R multiple, usually revenue— well, revenue could either be last 12 months or next 12 months. So, so that one goes either way. Growth is almost always kind of backwards-looking growth, not forecasted growth. So it's a little bit strange, right? But, but I'd tell the audience, hey, just make sure you know what you're looking at because don't accidentally compare one-off, you know, forward revenue versus one-off trailing revenue.

Okay, so as you know, I focus a lot more on operational and operator metrics than investor metrics. So as we wrap up, tell me if I've got this right. On the ERG score, if you have a higher ERG, that means Wall Street likes the stock, and a lower ERG means they don't like it as much, but we need to understand why. Is that a good way to frame it?

So for whatever it's worth, it's close. I think EV/DR, enterprise value to revenue, is the first order, does Wall Street like the stock? And if you're above median, you know, if you're trading at 10x, Wall Street likes you. If you're trading at 2x, Wall Street doesn't like you. That's the way I think about it conceptually. And all EV, all the ERG ratio does is say, stop, wait, if you could get one more data point, which is the growth rate, maybe you're gonna change your mind about some of these stocks. 'Cause you might think that Monday looks expensive at 10 times revenue, And it is, but given its growth of 46%, its ERG is 0.22, right? So, so that's what it's kind of almost a correction that you say EV to R, if it's 2x, they hate you. If it's 10x, they love you. And then you adjust it for growth and then say, well, Monday, 10x divided by 46 is 0.22. So that's kind of the bargain basement, even though it's at 10x, right? So that's really the use of this metric, right?

Got you. Well, you know, we're gonna have to wrap up for today, but one of the things that you and I both love is data that you can go play with and interact with and experience it for yourself. So I think the Meritech Capital, um, site where they talk about growth-adjusted EV to NTM revenue is a great place for people to go and see this in real time, correct?

Yeah, I love playing with Meritech Public Comps. It's for public stocks, it's fantastic. I don't know where they get the set there, Ray. I presume it's a hand-selected set of companies. So it'd be interesting to look at that. But boy, great data, great definitions. They always have their definition in little font right on the page. So you know exactly what you're looking at. And the only disadvantage for guys like you and me is it only covers the kind of stratospheric world of public companies, kind of $300, $500 million ARR plus. So the numbers aren't that useful if you're dealing with a $5, $10, or $15 million company. But nevertheless, it's fantastic research.

Well, Dave, I know that you're Dave CAC Kellogg, but thank you for bringing the energy into ERG and for supercharging this particular episode. Really appreciate it.

Yeah, thanks, Ray, brother Ray, and, uh, have a good one.

Bye, everyone.

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