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URL:  https://boards.fool.com/the-internet-bubble-was-when-i-started-looking-at-34079465.aspx

Subject:  Re: How long do P/S last? Date:  12/8/2018  12:27 AM
Author:  12x Number:  106407 of 111912

The internet bubble was when I started looking at market caps to value companies.

The internet companies were truly confusing how to value because they were growing like 300% year over year. Or more. In an entirely new industry that didn’t exist that changed the way we lived over night. And many were losing money. So P/E ratios were thrown out the window. So standard valuation methods did not apply.

But there were clear signs of mania. Companies were putting .com at the end of their business name and seeing their share price go up 500% the day they made the announcement.

The thing I learned during the internet bubble is fast growing companies are difficult to value. Standard valuation methods do not apply. Also, as long as liquidity doesn’t become a factor, earnings don’t matter. If you think that’s nonsense consider there was a period when many thought anyone who bought stocks not paying dividends was reckless investing. They may as well have been gambling. The whole point to buy stocks was for dividends. The book “Theory of investment Value” by John Burr Williams, written in 1938 and the book Buffett based his valuation method on, argued a stock was worth the sum of all the future dividends it would pay subtracted by a discount for the time premium. Not earnings. I applied the formula to earnings and I found the formula roughly equates to a PEG ratio of 1 for your typical run of the mill 10% growers. And if it takes a few years before the company starts generating profit, who cares? All you have to do is factor the deficits into your formula. It’s not as though the losses come out of your own pocket!

I will tell you I was around during the internet bubble. And yes there were many who said valuations did not matter. These were the people who got swept up in the mania and thought the Internet was just going to grow indefinitely. It was clearly overvalued to me. It was clear we were seeing a mania. I do not feel that way now. Stock prices are high, yes. But the quality of the companies going public are much better and the stock returns and prices are much, much more realistic. Talk to me when MDB goes up 2000% in a single year like qcom did in 1999. You can just look at the charts and see the extreme difference in the markets between now and then.


With regard to “valuations do not matter.” I am not proposing that at all. What I am proposing is until you find me a better valuation tool I can rigorously and objectively apply to these fast growers I will continue to go by “gut feel.” The problem is you can’t. Because valuation requires prediction. Accurate prediction. And you can’t predixt this stuff.


The reason you’re hearing “valuation does not matter” is because valuations are the highest since the bubble. But so is revenue growth. This is the first time since 1999 that we have seen companies going public growing revenues at a 50% clip en masse.

The growth isn’t as high as the 500%+ like the aol, excite.com and lycos of yesteryear, but the valuations are also much more sane.

Bottom line is as more and more about a companies future becomes unknown, it becomes more difficult to value. After the financial crisis dust settled, I put a lot of focus on bank stocks. Those were a lot easier to value.


Quite frankly yahoo always sucked. They bought so many companies they paid billions for that a few years later they shut down. Geocities, overture, etc. poor management has always been their problem. They have (had) the worlds busiest website and squandered it.


Anyone who studies history and keeps an objective mindset will at least question what I’d going on. Surely the most conservative investors would have bailed MDB by now. But those are the people who will always be cutting winners.
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