ZUMZ costs more than GOOG!
ZUMZ: PE=63, forward PE=40
GOOG: PE=64, forward PE =37.
You may say that ZUMZ earnings are deceptively low. This is true to some extent. However, the operating cash flow for the last 4 quarters amounted to $21 M. Even if we count all capex as owner earnings, we should optimistically conclude that ZUMZ is trading for "merely" 45 times its owner earnings.
You may object that ZUMZ was always that expensive. This is mostly true (forget what happened this summer). However, tripling owner earnings in 3 years is a trick that can be done once, but not twice. Indeed, operating cash flow has more than doubled in 2005, but grew less than 50% in 2006, even as revenue growth continued at 30%. This means that the effect of the economy of scale will soon be exhausted, and the bottom line will grow more or less in sync with the revenue. Achieving 40% growth rates suggested by the current valuation even for the next 2 years seems to be very unlikely, but even if the company does the trick, be sure to expect contraction of multiples by 2009. With anything reasonable (say, 25x), and assuming no dilution, 15% annualized returns is the best
we can hope for.
I expect to see ZUMZ below $30 at least two more times before it climbs above $40.