Valuing the New Economy isn't getting any easier.
I've an investing weakness -- and the evidence that I've seen suggests that you might have it too. To be specific, I find it very difficult to place a value on businesses that are out of the ordinary. And in particular, 'New Economy' businesses with growth aspirations.
In a sense, of course, we've been here before. Ten years ago, dotcommery was all the rage, with stratospheric valuations placed on companies such as Amazon, Netscape and Microsoft. More recently, we've seen the same sky-high prices paid for shares in businesses such as Google.
And it's not just the private investor that finds it a tough call to make. Television company ITV (LSE: ITV) lost a bundle buying the Friends Reunited website, for instance. And while I haven't chatted to him about it recently, I'd be surprised if Rupert Murdoch's plunge into MySpace turns out to be as profitable as originally envisaged. Even my wife has succumbed to the lure of MySpace rival Facebook.
All of which came to mind when I looked at the latest news from Telecity (LSE: TCY), which is about as New Economy as I like to go. Simply put, the company builds and operates data centres, and reckons itself to be Europe's largest operator of them, with 23 data centres in across Europe.
A data centre? Sometimes called 'server farms', they're huge -- and secure -- buildings housing lots of computers, well-equipped with power supplies and fast network connections to the outside world.
The words you're reading now, for instance, don't come from a computer sitting at Fool HQ, for instance, but from a data centre somewhere. Facebook, for example, is a Telecity customer. As is Internet Service provider The Planet, which hosts 15.2 million websites.
And business at Telecity is booming. The last full-year results, for example, which came out in February, showed a 27% growth in revenue, a 58% growth in EBITDA, and a whopping 108% growth in adjusted diluted earnings per share.
Monday's interim management statement promised even more good news, talking of further expansion and strong growth in recurring revenues.
And in contrast to the cash burn associated with dotcom companies, Telecity appears to be strongly cash-generative, holding £32 million of the stuff at year end. The balance sheet is strong, too, with £287 million of tangible assets in the shape of those data centres.
A Google or a Twitter?
Of course, there's a view that says Telecity isn't 'New Economy' at all -- and that New Economy shares must somehow be more speculative, more blue sky, and with profits, cash and assets all a long way in the future.
I don't buy into that. There's no rule that says New Economy shares have to lose money and burn cash -- and plainly, Google has no problem with either profits or cash. Web 2.0 poster child Twitter, though, is another story. (Although I gather that some limited advertising revenues are planned, at last.)
So in that sense, at least with Telecity, there's an argument to be made for going with traditional measures of value such as its PEG ratio measure of earnings growth of 0.9, and its P/E ratio of just over 20. The yield is zero, because the company doesn't pay a dividend, preferring to reinvest earnings in growing the business.
All of which troubles me slightly. I've never bought data centre space, and I don't know anyone who has.
I've no idea how prospective customers evaluate a data centre business, or how they measure their satisfaction with the prices they pay and the service they receive. And while Telecity prefers to describe growth in terms of megawatts of capacity, I prefer to speak in terms of customers, revenues and square footage.
In short, I won't be buying into Telecity, even though I'm sure it's a perfectly sound and respectable business with every prospect of success.
Simply put, it doesn't suit my investing style, and I'm not sure I could read the company's annual reports and learn as much about the business as I could by reading an equivalent report from -- say -- a consumer products company or engineering company. So I'll invest there, thanks, and give Telecity a miss.
But am I missing an opportunity? Am I irredeemably boring and cautious? Or pragmatically aware of my own limited abilities when it comes to understanding the business?
Comments in the box below, please.
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