<<Do you think this is a valid way of measuring the valuations of internet stocks?>>
NO, YES, MAYBE, IT DEPENDS.
Using a multiple of sales to value stocks is often used as last results to justify the valuation of companies which have no record of earnings, or for which no other useful valuation methods apply. Used as a stand alone valuation parameters it becomes a suckers multiple.
I would only consider using a price to sales multiple to value an Internet company (or any other company) if that company has strong and stable (or improving) gross profit margins and a strong and predictable sales growth rate and I would only use it in conjunction with other valuation methods.
A price to sales ratio alone does not tell me if the stock is overvalued or undervalued. It helps me establish, based on sales growth, when I might expect the stock to be attractive based on traditional valuation methods.
Let me explain. Let's assume that company ABC has a December 31 year-end. Last year they had sales of $100 million, gross profits of $25 million and a loss of $15 million. Let's also assume that its market cap is $400 million, or 4 times sales. Is the stock overvalued or undervalued? Who's to say?
Now, if sales are growing at a rate of 100% a year and show no signs of slowing down, gross margins remain stable and expense are not growing as fast as sales, then I could assume that in two years the company would have sales of some $400 million, a gross profit of $100 million and net income of let's say $50 million. Now the stock would be trading now at 8 times year 2 earnings. Is the stock overvalued or undervalued? Now we can start arguing about valuation.
There is way too much superficial talk on this thread about price to sales valuation without anyone trying to understand what it really means. You can't pick out just any valuation ratio to justify unrealistic valuations. I have said before that with BII the key in growth in sales and gross profit margins. Sales do not appear to be growing fast enough, given the company's current razor thin gross profit margin, for me to see net income any time soon. What do sales have to be at 8% gross profit margins to cover $20 million in expenses? We can all do the maths.
I am not suggesting that BII can't improve their gross profit margin. I am only pointing out that people on this thread are not focusing on the right thing.
Cheers |
