Xero on its way to more than a pure accounting play!, page-41

Agree on the overvalued part. Although, I would think that most technology companies would trade on a price/sales multiple of at least 3 as they usually operate on high margins.

To illustrate my point. A stock with a 20% margin trading on a p/s multiple of 3 would therefore trade on a p/e of 15 (3/20%). Given these companies tend to have good growth prospects and ability to translate a high portion of their earnings into free cash flow that's a pretty conservative valuation.

Conversely, a P/S multiple of 3 might be high for low margin low growth business. For example a 5% net margin stock trading on a p/s of 3 would equate to a p/e of 60 which unless they have incredible growth prospects if expensive.

ASX is the ultimate example of a high margin business. It trades on a price/sales multiple of 10 and I think it offers pretty good value at present.