We all know what happened to the booming tech stocks of a decade ago. They crashed, because they were ludicrously overvalued. But that says nothing about the businesses behind the madness of the crowd. So where are they now?
Did you chance your ARM?
ARM Holdings (LSE: ARM) makes processor chips that power phones, PDAs, smart cards, and the like. The company, on its web site, tells us that "At least 90 ARM processors are shipped every second". ARM's business model of licensing its technology to semiconductor companies has been a success, and all of the hopes of those investors of 2000 have been fulfilled, except one. Anyone who bought at the peak of 2000 would still be sitting on a 90% loss today, a full 9 years later.
ARM is undoubtedly a quality company producing quality products, and with a share price of £1 and a prospective P/E of 18 today (market cap £1.3b), and with decent earnings forecast for this year and next, I think you'd probably do OK buying ARM shares today with a long-term view.
But it shows that even "Long term buy and hold" investing can go disastrously wrong if you ignore valuation and pay far too much to start with.
Autonomy
Another favourite in Foolish circles at the turn of the millennium was Autonomy (LSE: AU), a company that specializes in intelligent management of large amounts of data -- just what the Internet needs. Despite some doubters, the company has been a resounding success. Have a look at this performance:
| | 2004 | 2005 | 2006 | 2007 | 2008 | (f) 2009 | (f) 2010 |
|---|
| Turnover (£m) | 34 | 56 | 128 | 173 | 344 | | |
| Pre-tax profit (£m) | 4 | 11 | 29 | 48 | 128 | 196 | 241 |
| EPS (p) | 2.6 | 6.6 | 11 | 16 | 42 | 63 | 77 |
Pretty stellar, eh? And in that time the share price has gone from a low of £2 at the start of 2005, to nearly £13 today. That's been a great investment, in what looks like a great company. And with a prospective P/E today of under 20 and a PEG (that ratio beloved of investing star and author Jim Slater) of less that 0.5, it still shows classic growth characteristics. And it hasn't been hammered by the current economic gloom.
But had you invested at the peak of 2001, eight years on you'd still be sitting on a loss of around 65% -- better than ARM shares, but not a recipe for a comfy retirement.
What's NXT?
It's a company that invented slick, flat, speakers, that's what. Another boom darling, NXT (LSE: NTX) promised to revolutionize the way we hear sound from phones, computers, and all sorts of other sources. I never really saw small speakers in the same commercial desirability league as processor chips or information management software myself, but there was surely still a pretty big market for nifty speaker technology.
Unfortunately, NXT struggled to turn that technology into hard cash, and we're still waiting to see if the year ending March 2009 will be the company's first profitable one. The share price? You'd probably best look away if you're of a sensitive disposition, because from its peak of around £25 in 2000, the shares are down to 7.5p today. That's a staggering loss of 99.7%
The Lesson?
It's going to sound like trite pontification with the benefit of hindsight, but these stories really do bring home how vitally important it is to understand the valuation of a company before you consider buying it. There is a school of thought that expects some companies to always appear pricier than traditional valuation methods might suggest, and it does seem to happen for quite long periods of time with genuinely growing companies. But there clearly is too high a price to pay for any share, no matter how good the underlying company.
These three today might have been worth the money all those years ago had they been on the point of curing death, but slicker mobile phones, more accurate web searching, and tiny speakers? Nope. Whatever your strategy, valuation is vital!
What now?
ARM and Autonomy have done well and stand a good chance of rewarding investors for years to come, based on today’s much more rational valuation. But NXT has turned into a penny share the way they usually do -- by starting expensive and falling for good reason. I sincerely hope NXT can turn it round for the sake of its long-suffering investors, but it's not my kind of investment.
