13 December 2018

In tech land, valuation rules just don’t apply

Anyone trying to explain the behavior of tech stock investors is doomed to fail — and the Hong Kong Economic Journal’s investor diary column explores just why.

Take the theory tweeted by Netscape founder Marc Andreessen. He suggested that at any given time, a listed firm’s shareholder base is dominated either by growth investors, value investors or arbitrageurs.

This can explain why a company’s shares are dumped when it shows signs of a slowdown in either revenue growth or subscriber numbers. For growth-oriented investors, even a drop from high to low single-digit growth is a disaster.

But the theory doesn’t hold water in the case of the post-results falls in Twitter and LinkedIn shares. LinkedIn is expanding its data center for long-term growth, leading to cautious quarterly guidance. Twitter, meanwhile, posted 76 percent year-on-year growth in revenue per timeline view in the reporting quarter, despite declining user growth.

In these cases, the crumbling share prices are more likely the result of overly rosy expectations. Twitter has a price-to-book ratio of 33 times and LinkedIn’s PE is as high as 941 times.

Going by Andreessen’s theory, when a firm’s share price slides due to selloffs, value investors become the mainstream, because they are mainly drawn to a company’s ability to generate cash and willingness to reward investors.

Again, online shopping firm Overstock, which is trading at five times earnings, should be the ideal investment target. But its low price suggests the opposite. Fears about earnings or even the possibility of the company swinging into the red would seem to lurk behind the depressed valuations.

Amazon Inc., with its 612 times PE, 17 times price-to-book ratio and four times price-earnings ratio to growth multiple, is another outlier that’s impossible to explain. We can only say that somehow investors have full confidence in Jeff Bezos’ long-term vision and are willing to stick with him, rain or shine.



Freelance journalist

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