There is nothing more irksome than the smugness of some momentum guy who dismisses valuation as irrelevant.
The current hot air craze is with "cloud" companies:
Amazon
LinkedIn
Netsuite
Workday
Salesforce.com
Concur Technologies
Commvault Systems
All these companies have solid topline growth, but there are minimal cashflows relative to their market value. The market is incorporating an awful lot of future unknown growth into present valuations.
For example, Workday (WDAY): $12b cap, $11b EV, 38x P/Sales, 750x TTM cash flow, 15% short interest, TTM sales are $308m, topline growth rate is 61%. The firm hasn't gone FCF positive yet, but is at the inflection point. What size do revenues need to be to justify a $12b market cap in the competitive tech industry? I would say a reasonable multiple is 4x-5x sales. 5x sales assumes revenues of $2.4b - that equates to a 50% CAGR rate over the next 5 years. Is that possible? Yes. Is it likely? Probably not (unless they are the next incarnation of Microsoft or Dell...but their addressable markets are much smaller and their competition much greater). Assuming 30% operating margins, then $2.4b in revenues produces $720m in EBITDA. That translates to the current stock price trading at 15.27x 5 yr EV/EBITDA. That is not todays EV/EBITDA multiple. That is 5 years from now, which assumes an awful lot has gone right. And if there is one thing we know from the tech world, 5 years is an eternity to techdom.
The most likely scenario is that these names will continue to trade at high multiples reflecting their leadership positions in high growth areas, but at some point in the future a transition or transposing of sentiment will take place and the tyranny of multiple compression will weigh down future appreciation. They may continue to grow like weeds and they may become obscenely profitable, but they will be paid less and less for those returns. In the case of dotcom leaders (CSCO, EBAY, INTC, MSFT, ORCL, EMC) they grew their earnings substantially but shareholder returns were highly muted by multiple compression.
