Softbank ends at 163,000 yen, down 15,000 yen and now at $1462 equivalent. This is down $148 from the last close in the US.
Nikkei Net had this somewhat dated story today. Perhaps the bubble is deflating a little if not bursting. Perhaps a little consolidation is in order for Softbank?:
Issued: February 21, 2000
IT stock frenzy feared pushing prices to unsustainable levels
Players' attitudes must change so that markets can provide healthy support for IT revolution
Venture capital has finally started to flow, and Japan's information-technology (IT) revolution seems ready for take-off. The unprecedented rise in tech-stock prices has pushed up Internet-related issues to unsustainable levels.
A dangerous money game lurks behind the new market that should be fostering new ventures, however. Practices and systems that distort stock prices and the attitudes of market participants will all have to change if the IT revolution is to run on fuel provided by capital markets.
"Channeling risk money into venture businesses will drive Japan's economic recovery," has become something of a mantra around Tokyo these days. The Mothers market (Market for High-Growth and Emerging Stocks), the over-the-counter (OTC) market, and the Nasdaq Japan market to be launched next autumn are all battling to win initial public offerings from promising venture outfits. The venerable Tokyo Stock Exchange, which is supposed to play the role of market guardian, appears to be caught up in the initial-public-offering boom itself and to have lost its cool.
The first issues to list on the Mothers market were Internet Research Institute Inc. and Liquid Audio Japan Inc. Buy orders for both flooded in right from their Dec. 22 listing. Two days later, Liquid Audio's share price had doubled from its subscription price to 6.1 million yen ($56,000). IRI opened six days later on Dec. 28 at 53 million yen, 4.5 times the subscription price. Both issues continued to advance in the new year, with Liquid Audio reaching 9.86 million yen on Jan. 31 and IRI hitting an intraday high of 77.41 million yen on Jan. 20.
The two largely unknown outfits overnight became symbols of the IT revolution. But what are the companies really like?
Liquid Audio's main business is distributing music via the Internet. The company has a partnership with Liquid Audio Inc. of the U.S., which provides the technology. The company uses game software downloading machines installed in convenience stores to sell singles for around 300 yen to customers who record them on their own MiniDiscs. The company, established in July 1998, reported 52 million yen in sales in the business year ended June 1999. It closed the term with a net loss of 360 million yen, and is unlikely to become profitable in the current year.
Liquid Audio competes head-on with the rental compact-disc industry, which is estimated to be worth 80 billion yen a year. Shops renting out CD albums for just 100 yen aren't unusual. Does the additional convenience of not having to return the CD to the store justify the much higher charge?
Cell-phone distribution channel
The company, however, is banking on being able to distribute music through cellular-phone networks. President Masafumi Okanda says: "Cell phones will be much more advanced in one to two years and it will be possible to use them to distribute music. This creates an entirely new market."
However, as one securities analyst warns, "Copyrights are still held by record companies and distributing the music in the way envisioned by Liquid Audio makes it look like nothing more than a music marketer. This is uncharted territory since it has not even been considered yet in the U.S."
Internet Research was founded in 1996. Its main business is managing electronic-commerce sites on the World Wide Web from which it receives sales commissions. Sales in the term ended June 1999 totaled 725 million yen, with a pretax profit of 64 million yen. Using money raised through its IPO, the company plans to set up a data center to permit it to continue expanding in scale. Its business strategy calls for setting up joint ventures with corporate clients to strengthen relationships and generate management fees in addition to the 6% commission it now gets on sales. IRI is believed to be negotiating with some 30 major retailers.
President Hiroshi Fujiwara describes his company's advantage in terms of talent, noting, "Japan has only about 100 Internet specialists who understand the state-of-the-art technology, and we are probably the largest or the second-largest employers of these specialists."
An analyst at an investment trust wondered whether a business model relying on both site-management fees and sales commissions can really be viable.
It is still too early to predict prospects for the two companies' businesses. It is also difficult to rationalize their high stock prices. Their prices cannot be appraised using conventional yardsticks such as the price-earnings ratio (PER) or price-to-book ratio (PBR).
It is extremely difficult to value the stock of Internet start-ups. One increasingly popular method of doing so in the U.S. employs different valuation methods depending on the growth stage of the companies.
Hiroshi Yamashina, Internet-sector analyst at Goldman Sachs (Japan) Ltd., says that a company's growth can categorized into six stages. At Stage 1, when there are little or no sales, valuation is based mainly on potential market size and number of customers. The stock price is gauged against these factors. A company will find it difficult to go public at this stage. However, if the company's market sector is expanding rapidly, the stock may still fetch a high price.
Stock price valuation parameters at the following stages are: Sales at Stage 2; EBITDA (earnings before interest, taxes, depreciation and amortization) at Stage 3; free cash flow at Stage 4; net profit at Stage 5; and net assets (shareholders' equity) at Stage 6.
In the U. S. Internet market, Yahoo! Inc. and Amazon.com Inc. are both at Stage 2, where the stock price-to-sales ratio (PSR) is the yardstick most commonly employed to value the stock.
Where do IRI and Liquid Audio's share prices stand when measured with PSR? Calculating their PSRs using the company's share prices at the end of last year and projected sales for fiscal 1999 gave IRI a value of 598 and Liquid Audio's 1,406. Liquid Audio's sales are projected at 60 million yen. Assuming the current sales and stock-price levels continue, the market has discounted sales for 1,400 years!
What this means is that prices cannot be explained by any investment yardstick. Actually, the prices seem to be the result of a major shortcoming of the Mothers market - extremely low liquidity. The companies offered only 1,000 shares each at listing.
An executive at a major investment management firm says, "The 1,000 share issues may be the smallest for any public offering in the world. The TSE deserves all the criticism it's getting for having failed in its responsibility to assure smooth trading on the Mothers exchange."
Funds major players
However, institutional investors are also driving up the stock prices. Determined not to miss out on the buying, fund managers fought over the 1,000 shares available. A fund manager at an investment-management firm says, "The stock price is definitely very high. But we had to include one share in our portfolio so we don't lose out in the fund-management race." Since investment trusts buy issues listed on the Mothers market on a long-term basis, they do not take profits quickly even if the share price skyrockets. This helps to dry up liquidity, and bid prices even higher.
Such frenzy is hardly unique to the Mothers market, of course. In terms of PSRs for issues listed on the stock or OTC markets, calculated by using their 1999 closing prices and estimated fiscal 1999 sales, Liquid Audio and IRI are followed by Yahoo Japan Corp., an Internet search-engine operator, and Trend Micro Inc., an anti-virus software producer. The top 10 spots on the PSR list are all occupied by Internet-related companies.
If U.S. Internet companies are included, Yahoo! would come in fifth, the highest of any major U.S. player. Amazon.com has a PSR of over 10, and America Online Inc. has multiples in the 20s. Evidently the popularity of Internet issues is unusually high in Japan compared even with the U.S.
The current market, in which investment is concentrated into a few Internet-related issues driven up to extremely high levels, is badly distorted. Hideaki Akimoto, a managing director at Daiwa Institute of Research, argues, "There is no explanation for the high price levels of Net-related stocks. It is nothing more than a bubble."
This harsh judgment should be taken seriously by investors as well as senior managers at the companies themselves. Venture firms seem to be looking at the stock market as a money-spinning machine. It is about time that market players come back to their senses.
The articles on "IT stock" and "Distortions" originated in the Feb. 7 issue of Nikkei Business magazine, published by Nikkei Business Publications Inc., and were written by Yo Makino, senior staff writer at the magazine, and staff writers Shunichi Tamura and Nagato Ito.
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