Tutorial: value a company that has no profits

With no earnings the P/E does not exist, so people reach for price to sales. It answers a very limited question: what are you paying per pound of revenue? It says nothing about whether that revenue can ever be profitable, and a pound of software revenue at 85% gross margin is worth many times a pound of hardware revenue at 20%.

Gross margin is the closest thing to a law of physics in a young company. It tells you the most this business could ever earn if every other cost went to zero. If gross margin is 30%, no amount of scale produces a 40% operating margin. Ever.

A company with a rising gross margin as it grows is discovering pricing power. One with a falling gross margin is buying revenue, and that revenue is worth very little.

The honest method: what revenue, at what operating margin, in what year. Then discount it back. Every input is a guess, which is exactly why you say them out loud instead of hiding them inside a multiple. A stated assumption can be argued with. A P/S of 30 cannot.

If your mature margin is higher than any company in that industry has ever sustained, you have not been bold, you have made a mistake. If the implied revenue exceeds the entire addressable market, likewise.

A valuation built on a margin that does not exist yet is a probabilistic bet, not a calculation. Treat it as one. The position size, not the model, is what determines whether being wrong is survivable.