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.
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