If the market thinks loss-making Ocado is worth £3bn, there were bound to be buyers for slightly-profitable AO, an online retailer of fridges, freezers and microwaves, at £1bn.
That was the safe prediction here earlier this month, and it has proved correct. In the event, AO was priced at £1.2bn and the shares flew a third higher on the first day of trading to value the company at £1.6bn.
But even the £1.2bn valuation is daft. AO last year made bottom-line profits of only £6.8m on sales of £275m. Punch those numbers through the calculator: 175-times earnings and 4.5-times sales for a distributor of low-margin electrical goods.
Buyers, naturally, are imagining the growth to come. AO is expanding its UK ranges, will soon open an operation in Germany, and incremental sales are said come at better profit margins once the infrastructure is built.
OK, but the valuation almost assumes AO is guaranteed to lead the entire European online market for electrical appliances and that competitors, such as Dixons and John Lewis in the UK, won't fight back.
To believe AO is so valuable today you surely have to think the company is capable of making profits of at least £80m on a sustainable basis within a reasonably short horizon, say five years. Then, at a £1.6bn price-tag, the valuation would fall to a more sober 20-times earnings.
Maybe it will happen. But £6.8m to £80m is one hell of a jump. Even at a compound growth rate of 50% for half a decade – in other words, astonishingly fast even for a whizzy online retailer – profits would still only have reached £52m by 2018.
You can't blame AO founder John Roberts for taking advantage of perfect conditions for floating an online retailer and banking £86m himself. He has clearly built a slick operation and the reports of AO's excellent customer service are credible. If outsiders are willing to pay ludicrous prices for a slice of the action, that's their lookout.
Or rather, it's a problem for the rest of us, as the fund managers are mostly betting with other people's money and pensions.
It's alarming that the professionals seem to think every promising but untested online retailer is destined to become the next Asos.
Maybe AO is the one, but at a £1.2bn valuation, let alone £1.6bn, the risks and rewards are hugely out of sync.
Welcome to the bubble.
