Hi Grace,
Thanks. In response to my post that “ATHM (has) a monstrous valuation (considering that) it's a transactions company,” you said “in its present form, but not in its intended future form.”
Let's look at that. In my post of last Sunday, I summarized Cisco's price to sales ratios for each of its quarter's ended March 31 since it became a public company in 1990. The average of the high price to sales multiples was 9.7 and the most recent high price to sales ratio was 18.7 times. Now, here is the question:
Assuming sales grow at a sequential rate of 30% per quarter in the future (something Cisco was only able to do for about eight quarters after its public offering), how long will it take for ATHM to grow into a price to sales multiple of both 9.7 and 18.7 at its current market price?
Based on this evening's close, ATHM has a market capitalization (or price) of about $19,000,000,000 ($19 billion is 120,483,000 shares times $158.19/share).
The first step in answering our question is to determine the amount of trailing revenue ATHM would be required to have at each multiple. That's a simple division of ATHM's market capitalization (price) by each of the multiples as follows.
Trailing revenue @ 9.7 multiple = $19,000,000,000/9.7 = $1,965,000,000
Trailing revenue @ 18.7 multiple = $19,000,000,000/18.7 = $1,016,000,000
So at 30% sequential revenue growth, how long will it take? Table 1 has the answer:
---------------------------TABLE 1
---------------------------Sequential--------Trailing
Quarter----------Revenue-----Revenue------Annual Revenue
-Ended---------(Thousands)---Growth----------(Thousands)
HISTORICAL
6/30/97-------------1,024--------NA---------------NA
9/30/97-------------1,907------86.2%--------------NA
12/31/97------------3,700------94.0%--------------NA
3/31/98-------------5,773------56.0%----------12,404
6/30/98-------------9,200------59.4%----------20,580
9/30/98------------13,815------50.2%----------32,488
12/31/98-----------19,257------39.4%----------48,045
3/31/99------------25,098------30.3%----------67,370
PROJECTED
YEAR 1
6/30/99------------32,627------30.0%----------90,797
9/30/99------------42,416------30.0%---------119,398
12/31/99-----------55,140------30.0%---------155,281
3/31/00------------71,682------30.0%---------201,866
YEAR 2
6/30/00------------93,187------30.0%---------262,425
9/30/00-----------121,143------30.0%---------341,153
12/31/00----------157,486------30.0%---------443,499
3/31/01-----------204,732------30.0%---------576,549
YEAR 3
6/30/01-----------266,152------30.0%---------749,513
9/30/01-----------345,997------30.0%---------974,367
12/31/01----------449,796------30.0%-------1,266,677
3/31/02-----------584,735------30.0%-------1,646,681
YEAR 4
6/30/02-----------760,156------30.0%-------2,140,685
9/30/02-----------988,203------30.0%-------2,782,890
(As in my previous post, please independently confirm my math and historical numbers before relying on any of this information.)
Looking down the column titled “Trailing Annual Revenue” you find that ATHM, compounding revenue 30% sequentially for thirteen quarters, will have over $2 billion in trailing revenue in the quarter ended June 30, 2002. At that point, assuming no change in the stock price from today's close, you will have a 9.7 times price to sales ratio.
The higher price to sales ratio (namely 18.7 times), however, will be acheived two quarters earlier at the end of 2001.
Now consider this analysis doesn't include any appreciation in the stock's price over the next three year period. So, here is what you have to believe to think this stock is reasonably priced based on today's close.
1. That historical valuation multiples will not reassert themselves in the market over the next 3 plus years or, if they do, that ATHM will grow revenue sequentially at rates faster and longer than any other technology company in history.
2. And that if historical multiples do reassert themselves during the next three years that this company will both grow revenue and warrant multiples comparable to those of Cisco, which by most accounts is in a league by itself.
3. Or that this kind of analysis is irrelevant and that there will always be someone out there willing to pay increasingly higher prices for the stock.
Short-term anything goes, but long-term, you really have to believe that history doesn't apply.
Regards
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