eBay's stock fall in the market has triggered a series of negative reactions, with several voicing concerns about sustainable valuation norms for the technology companies.Michael Moe, Chairman and CEO of Thinkequity Partners provides his perspective couched in common sensical way. Excerpts with edits:
Last week, the Houston Astros paid $18 million to have 42 year old – 7 time Cy Young winner – Roger Clemens pitch one more season. This equates to a P/W ratio of $1 million. ($18 million salary / 18 wins last year).Early in a pro athlete’s career, performance can be sensational but sporadic – the potential is exciting, but the predictability often lacks. An athlete is at his peak when they have gained enough experience to "know how to win" (as well as how not to lose) but also has not lost any of their physical ability. Jocks that are "over-the-hill" often know what they want to do, but their body just won’t do it. Similarly, a small emerging company can get investors excited by the growth and potential. There are numerous $50 million to $200 million companies that are growing at 30-40% per year. The problem is that most of these companies are immature and less predictable. Often by the time a company achieves a level of predictability to its business, it is at a size that makes it impossible to sustain high growth because of the "law of large numbers."
Ebay’s last week’s 18% correction (or $12 billion) seems silly given that the company only missed Wall Street estimates by a penny, and earnings still rose a sensational 44%; investors still need to acknowledge that future growth won’t be as spectacular as the past. Hence, the appropriate P/E multiple for future earnings is a serious issue.Qualcomm, another market leader and a company we hold in similar esteem to eBay was “shot” as well last week, despite great growth. The market is in desperate need of "new leaders".
Themes we like that will be good opportunities to find the stars of tomorrow are:
Offline Advertising Moving Online. Refer our coverage onPew Study on Search Engine Users:Currently just 3% of ad dollars are online. With networks being "Tivo’d" and people spending more and more time online – online advertising will continue to boom - online advertising is expected to reach $22 billion by 2008, from the current $10 billion.
Technology Dislocation and Disintermediation: This will continue to take place in fragmented markets and where the Internet can create efficiencies and insurmountable advantages to the leader.
Convergence in Media: Interactive media is being catalyzed by growth in broadband, powerful but cheap consumer electronics, user-created content (blogs) and innovative online business models.