Investors are chasing revenue growth — and are willing to overpay for that luxury.
In today’s economy, America’s largest and strongest companies are simply unable to generate top-line growth. Since they cannot increase their sales revenues, they have turned to buybacks, dividend hikes and, sadly, layoffs just to maintain their stock prices.
Investors desperate for growth without such shenanigans are piling into a few stocks, like Facebook, up 34 percent in 2014, and Twitter, up 15 percent in the past month.
But does growth really trump all?
While Twitter and Facebook are growing robustly, when do the stock prices get ridiculous? What would make a person pay 27 times sales revenues for a mega-cap company with no earnings, like Twitter?
Twitter, which reported growth of 124 percent year over year in its report after the close on Tuesday, made a whole 2 cents per share for the quarter with all that growth.
The question is, is it worth a $27 billion market cap? That’s hard to justify.
You see John Deere, the tried-and-true tractor company with a similar market cap, rings the register with $37.8 billion in sales revenue and $9.09 in earnings per share.
The same argument can be made against Facebook, except that it is already very profitable.
What would drive an investment manager to buy Facebook at 20 times sales and 81 times earnings?
Facebook makes good money — $2.38 billion in last 12 months — and should make more this year. But is that worth $190 billion?
IBM, which typifies this stale economy, is still a massive company with $100 billion in revenues, and it hasn’t grown in six years.
Is Facebook, with 1/10 the sales and 1/8 the profits, worth what IBM is worth?
Investors remember: It’s buyer beware.