Whereasearnings,bookvalue,andrevenuemultiplescanbe
computedforfirmsinanysectorandacrosstheentiremarket,
there aresome multiples that arespecific to a sector. For
instance,whenInternetfirmsfirstappearedonthemarketin
the later 1990s,they had negative earningsand negligible
revenuesandbookvalue.Analystslookingforamultipleto
valuethesefirmsdividedthemarketvalueofeachofthese
firmsbythenumberofhitsgeneratedbythatfirm’swebsite.
Firmswithlowermarketvaluepercustomerhitwereviewed
asundervalued. Cable companieshavebeenjudgedby the
marketvaluepercablesubscriber,regardlessofthelongevity
and the profitability of having these subscribers.
While there are conditions under which sector-specific
multiplescanbejustified,theyaredangerousfortworeasons.
First,sincetheycannotbecomputedforothersectorsorfor
the entire market, sector-specific multiples can result in
persistentover-orundervaluationsofsectorsrelativetothe
restofthemarket.Thus,investorswhowouldneverconsider
paying 80 timesrevenuesforafirmmightnothavethesame
qualmsaboutpaying$2,000foreverypagehit(ontheweb
site),largelybecausetheyhavenosenseofwhathigh,low,or
averageisonthismeasure.Second,itisfarmoredifficultto
relatesector-specificmultiplestofundamentals,whichisan
essentialingredienttousingmultipleswell.Forinstance,does
a visitor to a company’s web site translate into higher
revenuesand profits?The answernot only willvary from
companyto company,butwillalso bedifficultto estimate
looking forward.
FOUR BASIC STEPS TO USING MULTIPLES