Pros & Cons
There are a number of advantages that trading comps offer compared to other valuation methodologies:
- Quick to spread and apply compared to other valuation methodologies such as DCF
- Begin with a company’s share price which reflects the prevailing market sentiment
There are some disadvantages to using trading comps as well
- It is difficult to find companies that are truly comparable. As an example, Facebook, LinkedIn and Twitter all operate in the social space and may look very comparable on the face of it. But the reality is that these companies have different end users, business and revenue models and are not very comparable in terms of size (with Facebook being larger than both LinkedIn and Twitter)
- If the stock market is going through a bull run, multiples will be artifically higher and likewise, if the market is going through a bear run, multiples will be lower. Trading comps do not reflect a company’s intrinsic value.