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Giverny Capital on New Technology Companies

March 25, 2014 | About:

So where are we seeing popularity (and consequently danger)? Recently, we have observed the popularity of some new names in the technology field. A dozen or so years have passed since the tech bubble crash of 2000-2002. A new generation of young investors, and some older ones with “young memory”, have become infatuated with outstanding companies with a great potential future but that trade at high P/Es in the stock market. Facebook and LinkedIn are good examples but we could also add Netflix and Tesla Motors, the terrific electrical car manufacturer.

These are all outstanding companies with great CEOs. But in the stock market, it does not guarantee outstanding investment results if one pays a too high price for them. With an average P/E of more than 100 times for these four stocks, we would advise prudence.

Here is a little table on the new “Fantastic Four”

Company

Quote (1)

EPS 2014

P/E 14

Facebook

68 $

1,25 $

55

Netflix

446 $

4,10 $

109

LinkedIn

204 $

1,58 $

129

Tesla Motors

245 $

1,90 $

129

Average

   

105

(1) As of February 28th 2014

We could add a few words on Twitter, which came public last November. The stock quickly flew away (!) and now has a $30 billion dollar market value (1). The company is not yet profitable so we could not include it in the preceding table. Analysts estimate that the company will have $1.2 billion in revenues in 2014. So theoretically, if the company had a 25% net margin level that would translate into $300 million dollars in profits. At its present level, the P/E would then be the equivalent of 100 times this hypothetical scenario. As for the four other securities mentioned, we would advise caution.

Source: Giverny Capital Annual Letter 2013

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