The Biggest Variable Affecting Growth Stock Prices in Year(s) to Come is whether or not we will experience multiple compression.
Earlier this week, I came across this graph of Yahoo’s revenues and experienced a bit of PTSD.
Once upon a time, in 2000:
"Yahoo was worth $125 billion; several years later in 2008, it turned down a Microsoft offer to buy it for $44 billion. Long ago, Yahoo became the classic example of a successful pioneer that rested on its laurels even as its focus changed. It was an entitled culture that got super proud of its brand and lost sight of what a fierce competitor looked like, according to a former executive there."
While working at my first gig (at Mamma), I recall my then boss dismissing concerns of Yahoo’s declining P/E ratio, citing its growing revenues and earnings. To his credit, that was in 2000, and Yahoo’s revenues did indeed continue to grow, peaking at about $7 billion in 2008. Naturally, though, once revenues flattened and fell, then the wheels fell off. Yahoo was a media play and this is what makes certain tech bets attractive, in theory: the leaders have a more natural path for sustained growth.
In my first go at investing in the early 2000s (2003-05 to be precise), I had bought shares of Yahoo as it was the best publicly traded exposure to the then-nascent but booming search industry. Google was privately held until its 2004 IPO. In my Anti-Portfolio article, I discussed my boneheaded move not to buy Google shares at their IPO despite my intentions when my boss at my second company (AskMen) mentioned in passing that the shares – priced at $85 but opening at $98 – were too expensive (though in the end, I guess for the better: I didn’t become an investor but an entrepreneur instead, and the ROI on my investment in WatchMojo proved far better). I kept Yahoo shares hoping that despite clearly being lapped by Google, it proved a good enough bet on search, display and the Web in general. It turned down Microsoft’s rich $44 billion offer, and you can argue, the rest is history.
FWIW, I think a clearly focused Yahoo under Apollo could do well, especially if they bet big on video and global. We shall see.
The More Things Change…
At the beginning of 2021, it was clear that valuations and multiples had gotten ahead of themselves to ridiculous levels. Covid amplified the shift of capital to certain companies, and either that is
i) long term sustainable because Covid is an accelerant of trends and these high-fliers will grow into their valuations… or
ii) the law of averages will hold up and these outgrown valuations will stay at these lower levels.
No one wants to see a crash or major correction a la dot com bubble bursting in 2000, which then took a decade to get back to the pre-crash levels.
Global Reach Gives Business More Upside Potential
But are the conditions similar? Unlike the dot com boom where companies IPOd with little/no revenue, before finding product/market fit… one fundamental difference of today’s IPOs is they are more late stage, with companies that have clearly defined products, revenue growth in markets they tend to dominate. One key test is how much of their current business is in North America, and whether that traction can be replicated globally. America, after all, is an ever smaller piece of the global consumption pie. This is also one reason why big tech have grown no matter the state of the American economy and employment landscape.
Late Stage IPOs Reduce Gains – and Risks – for Public Shareholders
Indeed, Facebook was a stark realization that companies were now IPOing far later, with more of the return going to private investors than public ones. But if you look at Facebook’s post-IPO run, there’s clearly much upside for market domination (granted, Facebook is a quasi monopoly, but I digress).
In the next article, I will discuss three companies I bet on in 2020 which paid off big, before discussing a few high-flyers that could go either way in the 2020s.
Disclaimer: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. These investments represent riskier investments that make sense for my time horizon.