How Much Are They Worth?

12 April 2000 14:08

By Deborah Kay and Andrew Rosenbaum

 

With all the talk of technology stocks being overvalued these days

TORNADO-INVESTOR.COM decided to ask a consultant about her approach to valuing new technology companies.

 

Deborah Kay of the London-based strategic marketing consultancy rowbokay limited, tells journalist Andrew Rosenbaum how she does it.

 

Rosenbaum: What?s new about your approach?

 

Kay: The usual forms of valuing companies involve approaches that rely on earnings and operating profits figures, such as price to earnings ratios.

But these are not applicable to high-growth, high-tech firms, because the firms do not have any earnings and are not expected to have earnings for the next two or three years. Our valuation approach is to compare revenues, margins, and turnover ratios among similar firms that use and do not use traditional marketing analysis.

 

Rosenbaum: What is marketing analysis and why should you apply it?

 

Kay: Marketing analysis is simply identifying the appropriate price,

product, placement, and promotion and using that information to increase profits, which creates value for the firm and, ultimately, the shareholders.

 

Rosenbaum: Can you give an example?

 

Kay: Stepstone, an online recruitment company, has done the kind of marketing analysis that leads to long-term value. By designing its product and placement around the demand for labor in Europe, pricing its services using benchmarks, and promoting via various media, Stepstone is on the right-footing for long-term

growth. The market has rewarded them with an IPO value of GBP 800 million.

 

Rosenbaum: So if investors had taken the trouble to evaluate Stepstone?s Strategy in terms of marketing analysis, they would have been able to make an intelligent decision to invest in it?

 

Kay: We have a long way to go before many of the retail investors who rush in for shares of new economy stocks really understand the trade-off between short-term and long-term investment. But its an area worth exploring, because the latter are the ones who will survive.

 

Rosenbaum: How can an investor put this method to work?

 

Kay: An investor should learn to read a business plan, and to look carefully at the strategy the company will employ to obtain market share. It would require a great deal of detail for a precise valuation, but any investor should learn how big the market for a given product or service is, and what means the company will employ to make theirs the preferred one for consumers.

Rosenbaum: What details should an investor look for?

Kay: One of the most acute of the difficulties such companies face is the need to react to windows of opportunity under time pressure. Companies operating in this environment need to be proactive rather than defensive.

 

QXL is a good example. They are looking to retain market share and defend their position with an aggressive strategy of acquisition. It's hard for a young company to spend money, but it would be worse to miss these chances.

This suggests the kind of long-term strategy that merits investor attention.

-----------------------------------------------------------------------

 

 

 

 

 

 

Incoming mail is certified Virus Free.

Checked by AVG anti-virus system (http://www.grisoft.com).

Version: 6.0.488 / Virus Database: 287 - Release Date: 05/06/2003

 

---