Diamondback Energy Inc. (NASDAQ:FANG)

An analysis of the Price to Sales (P/S) ratio reveals a significant long-term compression in valuation multiples despite substantial growth in revenue per share. The transition from high-multiple valuations in the early period to significantly lower multiples in recent years indicates a fundamental shift in the market's valuation of the company's revenue streams.

Valuation Multiple Compression

Between 2013 and 2017, the P/S ratio remained predominantly in the double digits, reaching a peak of 19.13 in February 2017. A marked downward trend began in 2018, with the ratio falling to 7.95 in 2019 and reaching a minimum of 2.38 by February 2020. This lower valuation regime persisted through 2022, with the ratio stabilizing between 3.34 and 3.88.

Revenue Growth Divergence

Sales per share exhibited aggressive growth, increasing from 2.03 in 2013 to 38.31 in 2022. While the share price also increased over the decade, the growth in sales per share significantly outpaced the growth in the share price. This divergence is the primary driver of the P/S ratio decline, as the company generated substantially more revenue per share, thereby lowering the multiple the market was willing to pay for those sales.

Comparative Price Support

A comparison of the share price peaks shows a shift in fundamental support. The share price reached 125.15 in 2018 with a P/S ratio of 10.19. By February 2022, the share price reached a similar level of 127.89, but the P/S ratio had dropped to 3.34. This indicates that the 2022 valuation was supported by significantly stronger operational revenue than the 2018 valuation.