PEG ratio for SaaS

I learned a new metric called the PEG (Price/Earnings Growth ratio) which is a metric that adjusts P/E ratios by dividing them by earnings growth. Jamin Ball (Partner at Altimeter Capital) suggested on Twitter that we could use a similar formula for SaaS companies by taking EV / NTM (next twelve months) Revenue / NTM revenue growth which normalizes revenue multiples for growth. He didn’t elaborate on EV which to me could mean enterprise value or equity value. I recalculated some of the comps he provided in his picture, and found that when using market cap / ntm revenue / ntm revenue growth, I calculated very close to his numbers, so I suspect EV is “equity value” then, which is another word for market cap. If it were Enterprise value, it would be adjusted by adding debt, and subtracting cash. I could be wrong as I used Yahoo finance to recalculate his comps, which doesn’t always have the most up to date info.

One thing to note in the formula is you don’t express the growth rate as a decimal. For example, 33% growth would not be / 0.33 in the formula, it would be / 33.

It seems to me that the lower the number is, the less likely you are to be overvalued, because the formula is essentially your revenue multiple / revenue growth. Having faster growth rates would mean the ratio gets smaller. But depending on the EV, you could have companies with very different growth rates, but similar PEG ratios.