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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

Lesson 3 / 6

The market is a second opinion

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.

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.

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

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?

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

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

Frequently asked questions