Valuation of New Economy Stocks Throws Up the Same Old Dilemma

Daily Mail (London), May 10, 2000 | Go to article overview

Valuation of New Economy Stocks Throws Up the Same Old Dilemma


Byline: ANDREW ALEXANDER

HOW does one value new technology stocks? It is perhaps the most difficult question that investors, big or small, face these days.

If a company has an actual profits record and a realistic business plan, it may not be too difficult.

However, with many dotcom companies there is little to go on except ambition. The market itself has little idea of underlying value as can be seen from the fact that since November the tech-MARK 100 has more than doubled and then fallen by 35pc.

The fact that valuations can contain an element of madness is demonstrated by stock prices in the supposedly more sophisticated US market. A team of economists recently calculated that the top four US hi-tech firms - Microsoft, Cisco, AOL (premerger) and Yahoo - would have to grow profits by an average 30pc a year for 20 years to acquire what are currently regarded as standard valuations in terms of profits.

The catch is that, according to whether an earnings multiple of 15 or 30 is applied to the profits, the four firms' market valuation would then represent half or all of the American GDP likely by that date.

Mark Lambert, co-head of telecoms research at Merrill Lynch, is offering some clear thinking on the whole valuation question.

A stock might be rated on the net present value of future cash flows, he says. But of course future cash flows in high technology involve masses of guesswork.

The old-fashioned approach of estimating future (and distant) profits and calculating a prospective earnings multiple is not recommended. These businesses are international and accountancy standards across the world vary considerably.

However, you might try 'benchmarking'. In telecommunications, for instance, you can look at Vodafone AirTouch or British Telecom, established and profitable businesses, and compare a target company with them in terms of customer base, prospective growth, capital adequacy and so on.

However, Lambert adds helpfully, 'real life is not so simple'.

Some companies, for instance, are fully floating (like BT) but not others (like the German and Italian partly-privatised businesses).

Then there is the obvious issue of 'index characteristics'. Is the company in telecoms or pharmaceuticals or software? …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Valuation of New Economy Stocks Throws Up the Same Old Dilemma
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.