Yesterday I met with Sir Martin Sorrell and we spoke about the incredibly high market cap of Google compared to that of his company WPP, the largest ad agency in the world ($18bn compared with $160bn). During this conversation I came up with an explanation for this paradox that partly explained the enormous market cap differential of two companies in the same field with similar profits. Namely that WPP is a standard company which trades at a predictable P/E. But that there are only two kinds of companies that can achieve sky high valuations and go beyond the traditional valuation rules and those are are companies in the fields of building robots and building communities. Today at CUTEC I presented this idea at Cambridge and it was very well received.

Robot companies like Google, are companies who work on robots that do what humans used to do (i.e. search) and they tend to be winner takes all as all flock to the better robot. New users come at no extra cost. Community companies like eBay or Skype, are those whose value does not rely on intellectual property, but on the simple fact of being sure destinations because of “others” being there (nobody likes to go to an empty club type of thing). This concept requires a much more elaborate post but for now I leave it here: robots and communities is where inordinate value is.

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Elliott on June 6, 2007  · 

Biotechnology and internet technology companies have their highest valuations early in their life cycle because at that stage they are selling what people always pay the most for: dreams. One cannot put an objective value on a dream such as a simple cure for cancer or servicing the communications needs of everyone on the planet. Later, as a company does develop products, sales and profits and a history of such, inevitably the company is compared to others in its field with historical benchmarks, e.g., P/E, etc. When there are no sales, profits, or growth and only concepts one can envision any price per share. After the company is established nobody wants to pay for a 1,000 to one P/E if the company is growing 25% per year. Google is not being valued on its current sales and profits. Due to its amazing track record it is being valued on the yet to be announced products that everyone is expecting to be surprised about. The concept is not new. I have heard that in the world’s oldest profession the payment is received before [dream] rather than after the act [reality].

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