Do you need to chase growth?

I wrote about Nanoco (LON:NANO) , saying that I thought that even things work out well, it would be difficult to get paid off for it given the high expectations for earnings.

In a similar vein, I notice that WANdisco (LON:WAND) has a market cap of £330m, and is trading at a massive 84 times its revenues. Revenues are expected to increase dramatically over the next few years, but profits are not expected. The company had net cash at the final stage of £9.5m, but only £3.4m at the interim stage. Cash burn is clearly substantial, and if you work on the basis that it’s consuming £6m every 6 months (9.5m less 3.4m, which also ties in nicely with their NCF and capex outflow of £5.2m during the interims), then that gives you an estimated 3m before it runs out of money. Interims were issued on 26 September at 7am. Later on in the day, it announced a £19m placing. Given my statement about the cash burn, that should come as no surprise.

In the placing RNS they didn’t state they were going to run out of money, but instead said:

“The funds raised today permit us to continue with even greater conviction and at a faster speed along our strategic path. We will work from here to capitalize on the multiple opportunities for growth open to us, building further upon the clear lead we have in ALM and the exciting first-mover advantage we have in the rapidly evolving Big Data space.”

Woohoo.

But do you need to pay these monster multiples to buy into good growth stocks?

I’ve just looked at some historical records of Tasty (LON:TAST) , the restaurant chain. In June 2010, you could have bought it at just over 1 times revenues. That was for the year 2009 when revenues were £9.2m, and revenues has increased 15% for the year. In 2012, revenues had increased to £19.3m, and growth is expected to continue.

But supposing you had missed the boat on that. Suppose you bought a year later, when the company was trading at about 2.33 revenues. Maybe you had waited until May 2011, after results had been issued and the market given an opportunity to digest the results and send the shares a lot higher. If you had bought in on 6 May 2011, you’d be up 156%, against the Footsie of 6%.