Oh those incredible market caps! How far will they go??
We've got CORV, SCMR, JNPR north of 30 BILLION market cap, and quite a few others not far behind. I don't single these guys out for any particular reason; just 3 that came to mind. But consider this:
When did MSFT, CSCO, INTC reach $35 Billion market cap? How much trailing revenue did each have at that point? [It’s not important how these guy’s future is viewed by anyone; I only point out how markets used to value market leaders with strong and proven history, as well as strong potential, not so long ago]
Cisco reached that point somewhere around 4/97, best I can figure, and both Microsoft and Intel—closest I can figure—reached $35 billion market cap in the last half of 1996. Anyone with historical records for these companies from this timeframe, please check and post if you have a more accurate figure.
These "legacy" guys spend more on travel in a week than most of these startup companies have in revenue for their entire existence. Cisco had--if my data is correct--8.4 Billion in trailing 12 month revenues before the market honored them with a 35 billion market cap. Intel had over 20 billion in revenue during the year when they exceeded a 35 billion market cap, and Microsoft had nearly 9 billion in revenue.
Look how far these companies have come since then. All 3 of these companies were always too expensive from a purist value player point of view, yet they’ve gone up about 10x since that point. BUT—and this is a big but—none of them were even remotely close, back then, to the stratosphere of financial ratios that these optical embryos are now trading at.
Don’t think financial ratios matter? Maybe not now, at this moment of "photonic exuberance," but at the end of the day (or month or year or decade), these are all businesses, and they will be judged on their ability to run, compete, and grow their business consistently ( as opposed to “telling a good story” and generating techno-hype). Just as soon as they generate enough business to provide a numerical context for comparison, the comparisons will begin.
Right now it’s the proverbial “ladder against a cloud.” If those business and financial ratio comparisons—once they can be made--don’t exceed those from every known business in the history of mankind by a huge margin (because that’s the way they’re priced currently), there is simply no way to support the current prices. Then they will tank. Big time. Those that can assemble the remains and pull out the real businesses from the rubble will have the best chance of holding 10-baggers or better. I find it nearly impossible to believe that any of these new companies are 10-baggers from their current stratospheric levels.
My Point: “Buy and Hold/Ignore” does not seem a prudent strategy for these photonic rockets, from current levels. I’m sure many will disagree; only time will tell.
How many of these new companies really have the potential to generate the kinds of revenue numbers of CSCO/INTC/MSFT? How else could they be 10 baggers from here? How many years will it be before the vast majority of these newbies have even 1 billion in revenues, let alone 10 billion? How many of them will never reach that point?
PS I don’t desire to get into a discussion on the value of using market cap as a metric; it was just a point in space. |
