Nasdaq Knock Out!

Nasdaq Knock Out!

The Nasdaq fell more than 3 per cent overnight. What’s behind it?

Yesterday, The Australian Financial Review reported T. Rowe Price and Dragoneer Investment Capital had bought $150 million of stock in Atlassian, the software developer toolkit provider founded by Australians Mike Cannon-Brookes and Scott Farquhar. The ‘investment’ ‘values’ the company at $2.79 billion.

Atlassian generated just $149 million in revenues and made a $10 million profit in 2013. In other words, the purchase was made on almost 20 times revenue.

Recently, cloud-based accounting software provider Xero’s share price hit $42. At that price, the company – which generated revenue of $39 million in 2013 – was valued by the market’s wisdom at about $4.5 billion.

History demonstrates that such valuations are unsustainable and at massive risk of reappraisal. But as Andy Macken pointed out in our conversation here at the office this morning, there’s also risk of reappraisal upwards.

There are some really good businesses in the technology space but their stories and their potential is the same at $2billion, $20 billion or $40 billion. Therefore, trying to work out when sentiment towards these businesses changes is what makes going long or short with these companies so risky.

That’s the point Ben Graham – paraphrased by Warren Buffett – covered when he said that the market is a voting machine in the short run, and a weighing machine in the long run. It much easier to invest, in quality at value, over the long run than it is to try and trade on shifting sentiment in the short run.

And adding to the risk of a sell-off of course is the very high levels of margin debt that has been accumulated in the pursuit of stock market rewards. High levels of debt make investors think about the long term less, rendering them vulnerable to short-term shifts in sentiment.

With that in mind, we thought this internet parody of the subtitled video extracted from 2004 German film Der Untergang (“Downfall”) was fitting.

(WARNING: The extract is from a movie that angered many for an inappropriately sympathetic portrayal of history’s most notorious tyrant and mass-murderer – if watching this parody of one scene from the film may offend, please don’t watch).

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.