Valuations on companies always revert to their average levels, as determined by history. Generally businesses are valued based on growth, sales and earnings. History says businesses are usually valued between 2-times and 10-times sales, depending on the sector.
But recently, we have seen companies trading at 25, 50 and even 100-times their reported yearly sales.
Why would you or even the experts pay 100-times yearly sales for a stock? But they do! It is insane, based on no logic and of course, history is again proving them wrong.
Just check out Tiger Global Management, a hedge fund created by protégés of famed fund manager Julian Robertson. From January 1, 2022, through April, Tiger Global Management lost over 44% of its value, destroying over $16 billion of investor capital! The biggest losers are down 70%, 80% and close to 90% from their highs, and they all have one thing in common: Over the last few years, these companies were selling between 30 and 100-times sales. Now they are all trading for less than 5 or even less than 1-time sales.
Not sure, what value Tiger Global Management saw in these companies or what logic was behind their investment but they definitely did not their homework right.
When investing in a stock, consider the mean for the industry. That will give you a simple idea whether the company is fairly valued and you should invest in this company.
Sven Franssen