Eric: Lets try some valuation assumptions on ARBA. Lets say we take your figure of 131 times earnings. Lets then assume that stocks growing as fast as ARBA can trade at, say, ten times sales next years sales. Ok, now lets say the company can double sales every six months for two years, each time cutting the price to sales ratio in half -- to 65, then to 32, then to 15, then to 8. If this came to pass, the stock would be trading at 8 times sales two years from now. If you have enough confidence in the growth vector and if you believe it is only possible to own this stock if you buy it now, and if you believe that the market will reward the stock two years from now with a higher price to sales ratio because its growth prospects will still look great, then the stock price today, while extended, can be justified. This is the implicit calculus of the hyper-growth investor. Hyper-risky yes, but as other have argued in the case of e-commerce, a sound investment if all those "ifs" come true -- too bad they so rarely come true. The rarity of these things actually working out that way is why venture investors are not surprised to see 80% of their investments go bust.
p.s. -- the problem with the model of "general publlic as venture investor" is that nobody really explained the risks. The idea that most of these companies are expected to go bankrupt was never communicated. The suggestion that AMZN could possibly go bankrupt was met with howls and jeers when I began posting here. |
