How do you select the comparable companies for your target?
Let's say, company A is 3 years old with $5 million in revenue, providing software services in cloud computing. Would you select Oracle, Microsoft, Salesforce, Google, Linkedin, Facebook, AOL, IBM, ... for your comparable company analysis?
No doubt they provide similar (or same services or products) into the same or similar markets. They are competitors to each other with similar business characteristics, but their financial profile are different in size - the numbers are just too big for the large companies.
Can we compare Google/Microsoft with Company A - a $5 million start-up? Company A's ratios, returns, growth, margins will be different. In my opinion, they are not like-companies. In fact, a start-up requires 7 years on an average to become profitable. So, how can we actually compare its profitability with these giants?
Am I going wrong here? Any guidance will be of great help. Thanks in advance!
