High Valuation Blues

My Covestor portfolio is down about 5% in the past month. More proof that I am a terrible public market investor.

And despite that pathetic performance, my portfolio is one of the top followed portfolios on Covestor with 45 followers.

My portfolio is currently filled with energy and precious metal bets, reflecting my serious concerns over the dollar, our oil dependency, and asset inflation. I’ve been asked why it doesn’t include web/technology investments since that’s what I spend my time thinking about and investing in.

Well I’d like to put some money into Google or Amazon, two companies who seem to be doing most things right and are helping to build the web of the future. But Google trades at >50x earnings and Amazon trades at about 140x earnings. There’s not room for much error at those valuations.

I did add Google to my portfolio this morning which will bring some much needed tech to my collection of losing bets on oil and precious metals. I feel that Google is one of the best values in web/tech among all the public market stocks I looked at this morning. I think Google might do close to $10bn in EBITDA next year (calendar year 2008) and if so, it is trading at about 20x forward EBITDA. I tried to find another web/tech stock with that kind of valuation multiple and could not. If you know of a similar value out there, I am all ears.


Comments (Archived):

  1. CoryS

    Fred – I’m surprised that with your passion on smart phones that you haven’t looked at that category. Apple and RIMM are priced up, but Nokia seems to be more in line with your target range (and mine) with a forward PE of 17. Yep, full disclosure: I own some.http://quicktake.morningsta

    1. fredwilson

      I like nokia and my daughter owns it in her portfolio, but I see it as a hardware company with low operating margins and I prefer web services with high operating leverageFred

      1. markslater

        Nokia recently bought – Navteq, Enpocket, and couple of others – clearly trying to move up the stack though fred. I believe they came out and said they want to take control of apps and platform for their devices. Could be a buy time if this has not been fully factored in to the current price. Then again – its taking a risk on how well you think they can execute this strategy!

  2. Fred333

    I have Google in the portfolio for a number of years now. It is pone of those solid bets you can’t go wrong with.

  3. William

    It’ll be interesting to see what the gphone does to the google stock in the coming months, unfortunately it looks like they missed out on this years christmas rush, but I think this time next year the iphone hype will have died down somewhat and you’ll start to see a lot more disillusioned apple customers. If this ibrick stuff continues an open source type gphone would be able to grab a nice market share and google could start to get some hardware into their business (even if they don’t do the hardware themselves, google search and apps would most likely be the front runner and as we’ve seen with microsoft and vista this can help to increase your search volume.)

  4. jeremy

    i like bidu more than google.i agree with your oil assertions. the population is growing at an increasing rate (adding more oil users) and people say it wont go to 100. thats a joke.

  5. jeremy

    you might actually want to consider udn. it is an etf that is short the dollar. my only concern over the dollar bet is that euro exports are getting too expensive. it will be the central discussion at the g7 meeting. i wonder if we will see some open market purchases to support the dollar.

  6. Kid Croesus

    With all the droughts and global warming, I am increasingly a fan of water stocks. Did you see those pictures of Lake Meade in the New York Times?

  7. RacerRick

    I think that if you were paying attention to it, you could probably do pretty well. You can’t auto-pilot it and hope to do well.

    1. fredwilson


  8. markslater

    Fred -Might be a good day for AMZN! see the chartMark

  9. Evan

    Fred, it seems weird to me that when looking at technology companies your preferred metric is an EBITDA multiple. All else equal, how good a company looks by this metric is going to be directly correlated to how highly they’re leveraged. When you’re searching out technology companies, for the sake of finding technology companies no less, this doesn’t seem like a great idea.

    1. fredwilson

      I believe that all businesses are a worth the discounted value of future cash flows and I think eibtda multiples are a decent proxy for that if you include some notion of how fast the cash flows are growing

  10. ppearlman

    given yr expertise, if u took the time to survey screen and analyze small cap new tech stocks and then picked 3-5 faves to buy and hold im sure youd absolutely kill it 1-2 yrs out…

  11. RacerRick

    Nice timing… Cramer, today:”sell the four horsemen”. (APPL, GOOG, AMZN, and RIMM)

    1. fredwilson

      I think I agree with aapl, amzn, and rimm based on valuationNot so sure about googFred

  12. Steven Kane

    couple picksNovo Nordisk (NYSE: NVO) Altria Group Inc. (NYSE: MO)Bally Technologies Inc. (NYSE: BYI)Goldman Sachs Group Inc. (NYSE: GS)

    1. fredwilson

      That’s four, not two ;)Thanks steve. I’ll chase these down but I won’t buy goldman. I have hedge funds already!Fred

  13. kyle s

    speaking of “high valuation blues”, i doubt that’s the mood at facebook hq right now – but fb does have a $15b valuation on est $150m 2007 revenue. according to the wsj, net income is $30m. any guesses as to ebitda? i work in corporate restructuring and so am not familiar with healthy growing companies :)goog had approx LTM revenue of $2.7b , $650m LTM operating income, $280m LTM net income when it went public. it went public at a $25b valuation approximately (with some APIC since). in other words, it went public at multiples of ~10x LTM revenue multiple, 40x EBIT, 90x LTM earnings. applying those multiples to fb gives us valuations of $1.5b, ~$2.0b (assuming $50m LTM EBIT), and $2.7b, respectively. microsoft valued it over 5 times the highest valuation of that. they see some incredible growth story, that’s for sure…

  14. grishick

    Looks like you do not expect too much of Yahoo, Fred. Do you?

  15. kyle s

    to add to my comment earlier, check these data – i put current valuation information and numbers of employees into a spreadsheet. facebook’s number stands out to say the least. still you can see why people like gideon yu are jumping ship for jobs there!

  16. tcpeter

    Gah! Fred, are you kidding me?!? You, the bastion of serious investing, nurturer of companies, visions and dreams? Why are you concerned about where you are in a month? If you took a stake in a promising venture, would you get too worried if a month later another fund valued them lower? I’d expect not. Don’t feed the beast. Some days the dragon wins, some days you do. Unless something has changed fundamentally about the investments, or some truly better deal has come along, let ‘er ride.

    1. fredwilson

      I am letting them ride. But I honestly think that public market investing isnot my thingfred

  17. warren b

    stick with the kiddie pool fredlot safer in the VC vacuum

  18. Christian Cadeo

    What about the The9 (ncty)? They are a Chinese mmo company that has a couple things going for it:1.Valuation is pretty good against the other Chinese net companies on a PEG and PE basis.2.MMO market in China and Asia is huge and will continue to grow stronger. I live here and let me tell you besides mobile, online gaming are the best area to be in here. EVERYONE plays games non-stop. 3.Exclusive license of world of warcraft in china till 2009. This game as everyone knows is a massive hit for the online market and of the total subscribers for WoW most of them are from China. They just released the 2nd expansion in china and the numbers are pretty strong. Although the license expires in 2009, more than likely Vivendi will continue it as the cost of transition the existing database and localization is pretty prohibitive. In addition, there is a possibility that Vivendi may take a big stake in the company to capture all this upside instead of rev share with The9.4.EA has a stake of 15% in the company which was purchased in Feb. This allows the company to have a strong shareholder in the gaming industry that has a great portfolio that can be given to them. Point in case is that EA has agreed to give The9 rights to an online soccer game which will see strong demand as the Olympics approaches. Lastly, if Chinese law changes, I can see EA purchasing the company outright as EA is pretty keen on getting a footprint in Asia which will be their strongest market in the next couple years. Right now all of EA portfolios are titles which are dependent on unit sales at retailers. The problem is that with piracy so huge in Asia, the only realistic business option is delivering games via online. The9 has this.5.The9 is potentially buying a stake in 50% stake in MSN china for $100MM US. This can lead to tie up with MSFT video game property as well as integration such as IM and email into The9 games. The big upside to this if MSFT decides to buy out the The9 I am sure it is going to be at a big premium (the holdback right now is foreign companies cannot have 100% of a JV especially online).6.Rights to Audition 1 and 2. Big causal game which is going to provide additional leg for the online market. The online market right now is dominated by MMO which tend to be sword& sorcery titles which are male dominated. By having a game that appeals to a wider demographic, this is only going to lead to additional upside.What are the negatives?1.Current revenue is dependant only on WoW. Their other properties have not generated the earnings to diversify their portfolio. They are considering a one-trick pony right now.2.China increase more prohibitive laws against online gaming. This may come down as there have been major concerns that online gaming is corrupting the youth of china.3.China blows up. Hey there is a possibly that china is just propping up the economy till the Olympics. After that when the world’s eye is off, all these non-performing loans in their banking system will make the economy collapses. This will of course kill this company.4.Blizzard does not renew their license. Vivendi may decide that the hassle of transiting their current user base to a new company is worth more than keeping it at The9.5.Piracy of online gaming becomes more prevalent. Yes even online gaming is not immune to piracy. There have been reports of people stealing beta assets and literally recreating games on pirate servers with the exact same look and feel. You have to admit these pirates are pretty smart!Overall my gut is that there are more positives then negatives and that by December the stock will hit $60. Yeah optimism may ruin it.(Disclosure: I own a significant amount of shares)

  19. phoneranger

    If you want to make bets on systematic risk, you shd look at ETFs. They take out the noise. You might like XLE, XLK, XLB. But as we all know the best time is the worst time….and v/v. Also you have a underlying bullish assumption in your portfolio. Nothing wrong with hedging with some SDS if you aren’t.

  20. Michael

    Re: “7) Public market investing is largely about picking the right names and trading them well. Its about deciding whether or not to play the hand that is dealt. Private market investing is much more about how you play the hand.”The market is a game, now more so with algo’s on the hunt. With 1999 and 2007 as extreme examples, and many smaller examples, fundamental investing has been disrupted, with no tools helping you change your perspective on how to play the hand.Granted, your heart isn’t in the game.So there’s only one tool that would help you. A tool that sms’d your iPhone a symbol, with three buttons “Buy”, “Sshort”, “Ignore” – each buttons art designed to tell you what a bot thought, and what you’re trusted friends thought. Pressing a button updates the bot, the community, and your trading account, setting stops etc.Seems simple enough, doesn’t it?