Forum Moderators: LifeinAsia
Just read about a web site (not sure if I can post the URL within the terms of this forum) which is expected to float this year. (No - not Google).
Anyway - apparently it made £2.5m on sales of £20.5m in 2002.
And it's expected to float this year for £500m - That's a 200 times multiple of 2002 profits.
Doesn't that seem rather a lot? Perhaps profits have skyrocketed since 2002 - but its Alexa ranking hasn't moved (yeah - I know, I've heard all the arguments - let's skip the Alexa-bashing fest).
That multiplier would make me very wealthy if applied to my site. And probably the same for most people here.
But it's just crazy isn't it?
That's a 200 times multiple of 2002 profits
So?
Whether it's a IPO or an outright sale a company can be sold for figures completely unrelated to earnings. A lot of factors can inflence this. Perhaps they have a valuable property portfolio valued in the books at the 1990 purchase price.... perhaps they are a drug company with a cure for cancer in the offing.
But yes, there is a feel that a small bubble is forming. Now's the time to start thinking of selling up. But it's unlikely that the type of muliplier used for large/niche/market leader sites will apply to others.
I personally would hate to see another bubble. Strong economic growth would be fantastic, but bubbles aren't good for anyone long term.
When I went to school the rule of thumb was a P/E of 10 plus assets....and it isn't that long ago! Assets for dot coms are typically miniscule.
Personally, my company would be worth more than your example based on this calculation....is it really worth that much? I'm not selling, and no it isn't!
Things have gotten completely out of hand. Companies are being valued at ridiculous prices where the new owner has no chance of justifying it a few years down the road.
IBM P/E 21, MSFT P/E 31....both too high IMHO (and I own stock in them both)......P/E of 200....get real!
On the print side, we used to look at 6 to 8 years. Now it's down to four or five.
Anyone want to project even Microsoft's earnings out over two years? Things change so fast on the web that it makes running a biz difficult, much less buying it. I have been surprised that the banks are willing to lead as much money as they are. But, my bankers tell me that they "look at the people, not the technology or even the market."
One could say that the market right now is generally over valued, but to make a judgement based on p/e is pretty risky, especially since the p/e of probably 90% of all companies is not accurate.
Also, you need to realise that because interest rates are so low, where else are you going to invest your money?
I guess you can be Warren Buffet and keep it in cash, but who has that kind of luxury?
Also, you need to realise that because interest rates are so low, where else are you going to invest your money?
..... Shane
Irrational Exuberance......if it justifies a P/E of 200 why not keep the stock yourself? Best investment anyone could make.
If you need capital investment to achieve the P/E of 200 do you really think it would be hard to find a VC or bank that would provide it?
Companies that float and look to achieve P/E's in this range do so because they don't want to take the risk.....they want to take the money, and leave the public holding the risk.
That it okay for them, but as a shareholder how do you feel about a management team that wants to give the risk to you because they are not prepared to fund it and risk it themselves?
To me it says they want me to gamble where they won't. Not usually a good decision.
A P/E in the 10 to 30 range is risky, but a relatively conservative investment. A P/E in the 200 range is no better than buying a lottery ticket or betting on a horse. Yes, they can pay off......but is that a good way to run a business or personal fiscal policy?
If you need capital investment to achieve the P/E of 200 do you really think it would be hard to find a VC or bank that would provide it?
Are you saying that companies go for IPO only if they don't have strong enough basics to raise funds from VCs/banks.
No, I didn't say that for a second in those general terms.
Becoming a public company can be a form of portfolio diversification. Many are done for good legitimate reasons. But some are preyed upon and influenced into an IPO for other reasons.
If you believe in your own baby you should want to keep the vast majority of the stock. If you want to sell off a large portion of the stock, then the primary reason has to be for quick financial gain......nothing necessarily wrong with that, but it does imply you don't totally believe in the long term future of your company. That gain being balanced against your own self-assessed returns.
At the turn of the last century the World became accustomed to IPO meaning quick profit. Then those investors got a wake up call.
Any investment in company stock should be for the long term (15 to 20 years minimum) IMHO, not a quick profit, the latter being a form of gambling.
Conversely the business owners should take the same view, albeit they may feel a need for some portfolio diversification.
In the real World there are always those that will buy lottery tickets, and they are the prey who will take the risk.
It is still the case though that a P/E of 200 can be perfectly justified. It's not normally a P/E that you'd go to market with BUT there can be several factors at play and judging a company's IPO based purely on their P/E could be misleading.
You always have to look at the full balance sheet..
Conversely, you can find a slow growth company with a 10 p/e but horrendous amounts of stock options that are not properly being expensed .. it's kind of an invisible dilution that naive investors (that just look at p/e) tend to miss.
Thus all the kafuffle about expensing stock options..
There is, of course, an underlying argument percentages could be making is that we have to watch the fundamentals and avoid market hype. This I do believe in.
There are some bio-tech companies which have astronomical p/e ratios on little to no assets or earnings.
To invest in a company like that though, you need to compensate for the outrageous p/e. You do this by being intimately familar with the management team, the intellectual property, the scientists reputation for results, the size of the market they are moving into, the competition in the market, the revenue potential, etc.
Buffet always believes that you need to have a margin of safety. In the case of such stocks, the margin of safety is your 'inside knowledge' and personal research.
There are quite a few winning investors that will dump a stock as soon as it is 'overpriced' and buy a stock when it is 'underpriced.' This appeals to my sense of mathematics.
If no one wants it, base the price on P/E ratio and see what you can get.
If you have sub-optimally managed your widget site because you're a travel expert making tons of money off your travel site, and now want to sell me (a widgets expert) your money-losing 2 million visit per day widget site, I will pay whatever it takes to be the winning bidder, up to the amount I believe it is worth in the hands of a widgets expert.
