Will these stocks be the next big thing?

During older bull markets, such as the one we have recently experienced, there are inevitably investors who are frustrated that they haven’t participated fully. Like a cheer squad, they urge their brokers to find the next big thing. This enthusiasm is eventually transmitted into share prices and if momentum can be generated, it can feed on itself. Towards the very final stages of a bull market some very strange behaviours can be observed.

Witness, for example, the surge in the share price of the New York company, The Long Island Iced Tea Company. The only thing it did to trigger exuberance was to change its name to Long Island Blockchain. And when Kodak announced it was creating a cryptocurrency, its shares also surged. More recently, in the UK, AIQ Ltd raised GB£3.6 million by issuing 50 million shares at 8 pence each on the London Stock Exchange, giving it a market capitalisation of GB£4 million. Just two days later, AIQ was trading at 125 pence, or more than 15 times its listing price. In AIQ’s case, there was no announcement at all.

Australia is not immune to the migration of sentiment from enthusiasm to irrational exuberance. Companies with very little profit, and in some cases very little revenue, have been trading at market valuations approaching a billion dollars.

It is true that new technology can and does change the world, but as history has demonstrated repeatedly, not every company, or even many companies, succeed. Indeed, it is the case that sometimes only the consumer benefits, and the industry struggles without ever making high returns.

Here are three listed ‘concepts’ for you to decide whether, first, they are going to change the world and beat all competition, and second, whether they are still cheap. We think they’re too speculative and ‘early-stage’ to value even remotely appropriately.

Swift Networks Group (ASX:SW1)

Swift Networks, not to be confused with GetSwift, is a content solutions provider delivering in-room experiences to guests, which is a euphemism for supplying the movies and digital TV in your hotel room and in aged-care facilities.

The company announced operating profits of $1.0 million for the first half of FY2018, which does compare favourably with full year earnings of $1 million in 2017. But with competitors such as Comcast, BulkTV, Enseo and LG, does it compare favourably with a growth multiple of 19 times and market capitalisation of $37 million?

Afterpay Touch (ASX:APT)

Afterpay touch is ‘revolutionising’ consumer financing by offering a payment plan on purchases of four instalments and no interest unless a payment is missed. It’s layby in reverse. Retailers are excited because it is increasing their basket size and their overall volumes. Saturation however will render retailers less excited and inevitable competition could significantly increase acquisition costs for Afterpay. Assuming average fees of 4% of transaction value, bad debts of 1.7% of total transaction value, late fees of 1% of transaction values and loan book turnover of 12 times, along with cost and funding assumptions, we estimate a 16% marginal return on equity as the loan book grows.

The company will have to produce eye-watering loan book growth to justify its current market capitalisation and asset multiple.

PushPay (ASX:PPH)

Pushpay has created an awarded App that allows users to conveniently setup regular payments to charities, schools and churches after inputting credit card details just once, and software for those institutions to reconcile the donations. Research by Outreach magazine suggests Pushpay services half of the 100 largest churches in the US. It’s a big market and the company has said that it aims to facilitate US$10 billion in Annualised Monthly Payment Transaction Volume, representing less than 10% of annual giving to religious organisations in the US.

I am all for ideas that might encourage individuals to give more generously and more regularly. I am also a value investor and with the company still generating a loss, I suspect its $900 million market valuation is factoring in exponential growth in revenue per customer and transaction volumes.