Ticker League

Lesson 03 / 06

Relative valuation — pricing by comparison

A DCF tells you what a company is worth in isolation. Relative valuation tells you what it’s worth compared to its peers — and it’s how most professional analysts work day to day. This lesson teaches you to build a comparable-companies analysis and read it correctly.

Reading time: 25 mins

The market is a second opinion

Comparable company analysis — or comps — is the practice of valuing a company by benchmarking its multiples against those of the closest available peers: businesses with similar models, growth rates, and risk profiles. It is the most widely used valuation method in practice because it is fast, intuitive, and anchored in what real buyers and sellers are paying right now.

A DCF derives value from first principles — your own assumptions about the future. Relative valuation does something different: it asks ”what is the market paying for similar companies, and is this one priced consistently with them?”

Both methods matter. A DCF can say a stock is worth $180 while the sector trades at multiples implying $120 — and that gap is information. The best analysts triangulate: if DCF and comps agree, conviction rises; if they diverge sharply, something needs explaining.

DCF — intrinsic

  • Values from first principles
  • Independent of market sentiment
  • Powerful but assumption-heavy
  • Can be very wrong if inputs are wrong
  • Best for: stable, predictable businesses

Comps — relative

  • Values against peer multiples
  • Reflects current market reality
  • Fast and intuitive
  • Inherits the market’s mispricings
  • Best for: sectors with clear peers

Building a comparable-companies table

This is the analyst’s bread and butter. Take a target company, gather a set of true peers, line up their valuation multiples, and find the median. Then ask: is the target trading above or below its peer group — and is that gap justified? Below is a real-style comps table for the cloud-software sector, with CloudCore as the target.

Building a comps table follows five repeatable steps:

  1. 01Screen for peers — same business model, growth profile, and margin structure (not just the same sector label).
  2. 02Pull the relevant multiples for each: P/S and EV/Revenue for growth companies; EV/EBITDA or P/E for profitable ones.
  3. 03Calculate the peer-group median — not the mean. One outlier with a 150× multiple can drag the mean far from where most peers actually trade; the median is robust.
  4. 04Apply the median to your target company’s financials to derive an implied value (the next section shows this live).
  5. 05Adjust: premium or discount is justified by faster or slower growth, superior or inferior margins, or a different risk profile.

comps-cloud-software

CompanyP/SEV/EBITDAP/EGrowthGross margin
NimbusOne9.4×32×62×34%80%
StratoSoft8.9×29×58×29%79%
VaporTech10.1×35×71×38%82%
CirrusData8.2×27×54×26%77%
AltoCloud7.8×25×49×24%76%
CloudCore7.9×24×44×18%78%
Peer median8.9×29×58×29%—
The story in the numbers: CloudCore trades below the peer median on every multiple (P/S 7.9× vs 8.9×, EV/EBITDA 24× vs 29×, P/E 44× vs 58×). But it also grows slower (18% vs ~29% median). The question every comps analysis must answer: is the discount bigger or smaller than the growth gap justifies?
Reading the table
CloudCore trades at a P/S of 7.2× — below the peer median of 8.9×. At first glance, cheap. But it grows at 18% while the median peer grows at 28%. The discount is earned, not a bargain. This is the entire art of comps — adjusting for why a company deserves its multiple.

Two refinements matter in practice. Trading comps (public market multiples, as used here) reflect what minority investors pay today. Precedent transactions — what acquirers paid in M&A deals — typically carry a 20–30% control premium above trading values, reflecting the cost of buying the whole business. Similarly, forward multiples (next twelve months' estimates) are less volatile than trailing multiples (last twelve months' actuals), but they require trusting the consensus forecast. Choose the variant that matches how your target is being discussed and compared.

Deriving an implied value

Once you have the peer median multiple, you can derive an implied value for your target: apply the peer multiple to the target’s own financials. Select a multiple below to see what value it implies for CloudCore.

Implied valuation for CloudCore

Apply the peer median multiple to CloudCore’s financials. Current price: $44/share.

CloudCore revenue
$1.67B
× Peer median P/S
8.9×
= Implied equity value
$14.9B
÷ Shares
0.3B
Implied value per share
$50
▲ Implied $50 vs market $44 — comps suggest 13% upside if CloudCore deserves peer-median multiples. But it grows slower than peers, so a discount may be warranted.
Why the methods disagree
Each multiple implies a different value — sometimes wildly. That’s not an error: each captures a different aspect of the business. A professional presents a range across methods, not a single number, and uses judgment to weight them.

Choosing the right peers

A comps analysis is only as good as its peer group. Choose the wrong peers and the median is meaningless. The skill is selecting companies that are genuinely comparable — similar business model, growth profile, margin structure, and risk. Select each candidate to see whether it belongs in CloudCore’s peer set.

Building CloudCore’s peer group

CloudCore is a $12B enterprise SaaS company, 18% growth, 78% gross margin. Select each candidate.

The peer-selection principle
A true peer shares the company’s economic DNA: business model, growth rate, margin profile, and risk. Size matters less. A $12B SaaS company and a $200B SaaS company can be valid peers; a $12B SaaS company and a $12B oil driller cannot. Line up your own peer set in the Rankings.

Check your understanding

0/3 answered
01/ 03

CloudCore trades at a P/S of 7.2× while its peer median is 8.9×. CloudCore grows at 18% vs the peer median of 28%. What is the correct interpretation?

02/ 03

You’re building a peer group for a high-growth enterprise SaaS company. Which of these would be the LEAST appropriate peer?

03/ 03

Your DCF values a company at $180/share, but a comps analysis implies $120/share. What is the most professional response?

Frequently asked questions