When Google was floated last summer, it was valued at over 100 times its annual profit. Its valuation was greater than the more established and bigger profit-making Yahoo, which itself was considered overvalued by many. Talk started to resonate through the misty dotcom quarters that another dotcom bubble was in the making.
Talk of a bubble has not completely receded. CNNMoney mocked up an image of a floating balloon with the legend Google emblazoned on it this morning, while others fear than a share price which takes its valuation to 40 times consensus earnings has bubble written all over it.
Yahoo too,has a p/e ratio of 45, or, more alarmingly, its market valuation is ten times projected revenue for next year.
But, on the other hand, look at the growth! We like to focus on some of the sexy companies of the tech world. And of the organisations we follow, only Amazon has yet to release its results for the latest quarter. But all the companies out of the blocks so far have one thing in common, a year of startling growth. If this continues, then today’s p/e ratios will soon look justified.
Take Google. Yesterday we heard how its legal department had been busy, fending off suits from the Association of American Publishers and changing the name of Gmail to GoogleMail. But meanwhile its founders Page and Brin and the rest of the gang on its board were preparing for the announcement of the latest results.
Profits at Google were up seven fold - from $52mn a year ago, to $381.2mn in the third quarter of this year.
Of course, the fear is that the shares wil just keep going up with the profits, so the p/e ratio will stay up there in the clouds, and eventually will crash when the remarkable period of growth does inevitably come to an end.
But, on the other hand maybe the markets are getting it right. The Google share price has shot up since flotation - but not as fast as profits. In one of those statistical quirks, the dollar share price corresponds quite closely with the $mn profits. Yesterday, for example, profits hit $381mn, the share price rose to $335.
At flotation, however, it was the other way round, with the Google share price - which you may recall was considered too high even by the world’s greatest investor Warren Buffet, $85, when the latest quarterly profits were $79mn dollars.
And there’s a lot of oomph left under the bonnet too. With its Froogle shopping engine, which will enable the company to promote internet shopping more effectively - inevitably bringing in more revenue, and with its plans to offer an Internet TV portal, don’t be surprised if the company doesn’t ultimately increase profits from the current level by a substantial margin.
It’s a similar story with the other techs; eBay’s got its plans to throw ads at us while we enjoy free phone calls, and Apple has its video iPod.
If there’s going to be another tech bubble, it hasn’t been made yet.
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