Why a Cheap EV/EBITDA in Tech Is a Red Flag, but in Utilities It’s a Bargain: The Sector Trap Most Analysts Miss
How misreading multiples leads to expensive mistakes—and where the real value hides
At first glance, EV/EBITDA looks like the universal solvent of valuation—strip away capital structure, tax quirks, and non-cash distractions, and what remains should be comparable. Should be. But in finance, what looks simple often harbors a trapdoor.
The Mirage of Uniform Multiples
Imagine you stumble across a Tech company trading at 7x EV/EBITDA and a Utility at 12x. The rookie analyst’s reflex: “Tech is cheap, Utilities are expensive.” But beneath the surface, you’re not comparing apples to oranges. You’re comparing apples to power grids.
Here’s the heresy: A low EV/EBITDA in Tech can signal decay, while a high one in Utilities often signals fortress-like stability and regulatory privilege.
Capital Intensity: The Elephant in the Data Room
EV/EBITDA ignores a sector’s appetite for capital. Utilities, Telecoms, and Industrial giants guzzle CapEx just to keep the lights on—literally, in some cases. Tech, Media, and Software? Their factories are lines of code. The difference is existential.
- Utilities/Industrials: High fixed assets, constant reinvestment, depreciation often understates true maintenance CapEx. Their EBITDA is a mirage unless you adjust for the capital treadmill.
- Tech/Software: Lower capital intensity, higher margins, growth CapEx optional. Here, EBITDA is closer to true “cash flow”—but only if growth isn’t masking losses.
A 10x multiple in Utilities might reflect decades of regulatory-protected returns. The same multiple in Tech could mean the business is one step from obsolescence.
The EBITDA Illusion: When “Earnings” Aren’t Equal
EBITDA: the darling of dealmakers, the refuge of optimists. Yet, in Real Estate, EBITDA often ignores recurring maintenance—while in Consumer Staples, it’s a closer proxy for cash conversion. The devil is in the sectoral details:
| Sector | EV/EBITDA Typical Range | Why It Misleads |
|---|---|---|
| Utilities | 8–14x | Regulated returns, high CapEx, stable cash flows |
| Tech (Established) | 10–20x | Low CapEx, high growth, risk of disruption |
| Industrials | 7–12x | Cyclical, high reinvestment, EBITDA overstates cash flow |
| REITs | 12–18x | EBITDA ignores real maintenance, leverage distorts EV |
| Consumer Staples | 8–14x | Stable margins, but not immune to disruption |
Regulation, Moats, and Monopoly Power: Why Multiples Aren’t Just Math
The biggest secret: Sector multiples encode the market’s judgement of risk, growth, and structural advantage. Utilities trade rich because their returns are regulated and (usually) guaranteed. Tech multiples can collapse overnight on lost relevance. REITs may look “cheap” until refinancing risk bites.
A “cheap” multiple in a sector with high obsolescence risk is a warning—while a “rich” multiple in a highly regulated sector is often a premium for predictability.
EBITDA as a Map, Not the Territory
Here’s the real trick: EV/EBITDA is not a shortcut to value, but a clue to sector DNA. The same number in different industries is a cipher, waiting for context. Ignore that, and you’ll buy value traps and miss compounders.
- Always compare multiples within peer groups, not across sectors.
- Adjust for capital intensity, growth, and cyclicality before judging “cheapness.”
- Remember: The market isn’t irrational—sector multiples are signals, not mistakes.
Conclusion: Multiples Are Like Speedometers—But Every Car Drives a Different Road
The next time you see a “bargain” EV/EBITDA in one sector and a “bubble” in another, remember: numbers are only as wise as the questions you ask of them. The best analysts don’t just compare—they decode the story behind the multiple.
Because in valuation, context isn’t just important—it’s everything.