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“Faith” valuations are skewing the global tech industry

Markets are giving huge premiums to next generation internet and technology companies, while industry “gorillas” with gold standard business models and proven track records are being valued as failures, according to analysis by Magister Advisors, M&A advisors to the technology industry.



For example, next generation players such as LinkedIn and Facebook have price/earnings (PE) ratios many times higher than industry stalwarts Apple and Microsoft.

LinkedIn has a PE ratio of 711 and Facebook has a PE ratio of more than 70. Apple has a PE ratio of 14.5 and Microsoft has a PE ratio of 11. Other lofty PE ratios include Electronic Arts at 54 and Rackspace at 73.
 
To put the overrating in context, if Apple, a business with enormous brand value and a world-class track record of execution, received the same valuation as a business like Facebook or LinkedIn, it would be valued at many trillions of dollars.
 
Victor Basta, managing director of Magister Advisors, says: “Achievement is being punished. Unproven future value is worth more than achievement. LinkedIn and Facebook are incredibly important next-generation internet businesses, but it is absurd to believe they are worth several times, or even several hundred times more than companies that already dominate their sectors.”
 
He adds: “Soon companies like Facebook will reach their own level of ‘saturation’ and this should already be priced in. We may be connected to every cousin or sales executive on the planet, but short of hiring someone or showing them a picture of our mother’s 80th birthday, we quickly run out of enough commercial meat to justify these premiums.
 
“Also, while Apple and Microsoft have challenges to keep growing as quickly as the internet majors, Facebook for example faces its own growth challenge as it runs into the ‘wall’ of privacy concerns, and tries to extract pennies from mobile subscribers.
 
“The technology industry has always over-valued the next big thing, and some of this ‘irrational exuberance’ is perhaps understandable.  But where is the value for decades of performance?  It is only in the technology industry that a bird in the bush is worth far more than a bird in the hand.”

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