The Afterpay Touch Group Ltd (ASX: APT) share price is truly the closest thing I've seen on the share market to a roller-coaster.
Just look at this chart of APT shares over the course of 2019 so far.
Source: Google Finance – APT YTD returns
Although the price gains and falls of a share can see like a game, in reality, they are reflecting the real valuation of a company. In this case, of Afterpay's business.
Efficient market theory – the most commonly taught method of looking at the share market – tells us that the stock market is a completely efficient and rational place where companies get fairly and constantly valued by their cashflows – both present and future.
If this is true, it means that at various points of 2019, Afterpay as a company has 'rationally' had a value (market capitalisation) of $7.38 billion, $9.45 billion and $3.03 billion, all in one year.
Even more incredible is that Afterpay has been priced by the market at both $9.45 billion and $6.56 billion in just October alone!
You can probably figure out that efficient market theory doesn't hold much water with me, but I think these statistics prove its folly. How can the real, rational, tangible value of a business fluctuate so wildly in the space of 11 months (or even 1 month)?
For me, the answer is because investors and speculators are playing games with Afterpay – a giant game of chicken, to be precise. The winners are those who buy in first and sell out first, creating a frenzy of activity every time a major news story or development comes out. Positive? Hit the buy button before anyone else. Negative? The sell button. Rinse, repeat.
I don't like to join in on this kind of fun, but Afterpay has yet to turn a profit, so a traditional valuation is difficult to place on the company. However, Afterpay expects to turn a profit during FY21, which means, if the company's guidance is correct, it trades today on 138x FY21's earnings. For some perspective, even the highest-flying FAANG stocks Netflix, Inc. and Amazon.com Inc. are sitting on forward P/E ratios of 53 and 65, respectively.
Foolish takeaway
For me personally, I regard Afterpay's current stock price as lofty at best and will be staying away until some rationality returns to its price. It's my opinion that a business can't accurately be valued on future cash flow projections, so therefore I think I'd be taking a punt if I were to buy APT shares at these levels.
