I recently had occasion to ogle a business plan for what may wind up being a major Internet player in a few years. It’s smart and backed by people with proven track records, and there were the obligatory pie-in-the-sky, worst-case/best-case projections.
After all, what can we know about the future?
And this being a fairly complicated business, with all kinds of variables, there were a lot of different worst/best possibilities, all multiplying together to various potential profit outcomes.
Why am I telling you this?
Because while I was mostly struck with an enormous feeling of “why didn’t I think of this great business, I was also struck by something else:
Every variable had a worst/best scenario but one. That one — an “Internet price-earnings ratio of 75.”
In other words, it was anybody’s guess whether this company would be making $2 million or $50 million — who could say? But at least one thing was clear. Whatever profit it made, the stock market would presumably multiply it by 75 in deciding how high to bid the shares.
And of course this may be true. Indeed, these days, for anything vaguely related to technology or innovation of any kind, 75 is a fairly chintzy multiple.
I would just like to point out for you youngsters in the crowd that once upon a time a multiple of 75, even for an exciting, fast-growing company with great prospects, could not be taken for granted. Maybe that will be the case again some day, though I hope not. This is much more fun.
And while it lasts, it does have one highly positive effect, even if most of these valuations are absurd: it fairly sucks money into new ventures and innovation, which bodes well for America and the world.
Quote of the Day
Markets are very good at what they do, in part because they harness greed and envy (in fact, all of the Seven Deadly Sins except sloth) and turn them into positive virtues.~Rocky Mountain Institute newsletter
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