's Valuation

The list of stocks with price to earnings of 50x and higher has become pretty long. One example among many is (CRM).

The market value of at the recent ~$ 123/share is $ 16 billion.

In the fiscal year ended January 2010 earned just over $ 80 million.

In the first 2 quarters of this fiscal year the company earned $ 32.5 million.

They are growing revenues and earnings fast and expected to earn ~$ 150-160 million in the fiscal year ended January 2011.

Let's assume will successfully execute 800% earnings growth in the next 3-4 years and the stock price stays the same. Even if that aggressive assumption becomes real,'s price to earnings multiple would actually still be higher than that of Apple (AAPL) right now (obviously Apple is actually a moving target considering its own growth).

Using the most recent 4 quarters of earnings for both companies:

AAPL: Price $ 283/share, Market Cap $ 259 billion, Earnings: $ 12.23 billion, PE = 21
CRM: Price, $ 123/share, Market Cap $ 16 billion, Earnings $ 73.6 million, PE = 217

So clearly even the 800% growth isn't enough.

I mention Apple, not to compare the two businesses (clearly they are very different), only to put that valuation in some perspective*. Having said that my experience is stocks with valuations like have a tendency to get even more overvalued.

In many instances, the high flyers are transformational businesses with a great story. Some do actually end up justifying the seemingly high valuations in the long run**. I'm not smart enough to get that right very often so, in my case, the losses would surely offset the gains. It's very likely quite a few folks know how to effectively invest this way but I'm not one of them. Just a completely different game. For me, finding businesses with proven durable competitive advantages and buying them when there is a significant margin of safety is what works. may be the making of a great franchise. I've no doubt that there is a great story behind it. The question is: What are you willing to pay for promise versus what's proven?


* I'm not a proponent of Apple's stock but it looks even cheaper if you take into account the $ 50/share of net cash and marketable securities (nearly 18% of the Apple's market value) it has on the balance sheet. has less than 2% cash as a percent of market value.

** Though often the valuations of these businesses disconnect from any kind of likely future economic reality.
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