No victor, that isn't really a flaw in my premise. All, or at least most companies IPO at an extremely high PE/PSR ratio that is not sustainable. Over time these ratios fall into line with the rest of the market, which is why IPOs almost always underperform the market. That means that either the company must grow into the ratio, or the share price must fall to bring the ratio into line. About the highest PSR you'll usually find for an company that's been around for awhile is a SEBL or a VTSS with a PSR as high as 10-15; most companies end up with a PSR between 1 and 7 depending on their growth rate and profit margin.
When you see a company like a BVSN or an EPNY with a PSR up around 50-60 you have have to realize that they can't sustain 600% a year growth forever, and that eventually their PSR will come down to at least the 10-15 level, or more likely 3-8, which as I've said can happen by raising sales or lowering share price, or some combination of the two.
NETP originally had a PSR that was much higher that the current level. In fact a year ago it was in the 50-100 range, too. It is true, of course the that the growth rate of NETP will not remain at 400%, but in the short run I expect it to remain quite high. Thus I can't imagine the PSR falling much much below 10 in the near term, and therefore I expect the share price to keep up with the top line growth. Thus if sales rise 300% over the next year, I expect the share price to do the same, so long as the company demonstrates that it can obtain a reasonable profit margin (but there is no reason to doubt this). Obviously e-tailers that grow but can never make money can not sustain a high PSR, while on the other hand a company like VTSS with a lower growth rate but a very high profit margin can sustain a much higher one because it's really earnings that matter in the end, not sales.
You are correct of course that extraneous factors such as short term trading, share lockup expirations, rising interest rates, hype etc, can have short term influences on the share price as well. Thus the PSR could fall more short term, or it could rise back to 30 or 50 at any time. Long term though, the share price will track the growth. One of the problems with hype is that the short term gains it produces are not sustainable, and thus it just serves to create the need for more hype in the future, or it creates additional volatility which brings traders instead of investors. In the end the stock price will go where it will go, and where it will go is dependent on the performance of the company. If you question whether the stock can track sale growth over the long term I have to wonder if you've ever held a stock long term like an INTC, a MSFT, or an ORCL.
Thus I favor all possible PR that is targeted towards generating new business, because that type of PR will bring sustainable increases in share price, but I don't encourage the temporary gains that could come from hype even though it could bring me additional trading profit. After all, why should the company try to benefit traders? They shouldn't, they should try to benefit long term investors.
Carl |
