The tricky business of valuing Internet stocks
By Lee Han Shih
How do you value an Internet company.Revenue, its growth potential, its market share in the new economy or, as one American consultant famously remarked, by its "belief system"?
This is no idle speculation. A year ago, investors in Singapore and the region could marvel at the Internet boom in America from a distance, their lives untouched by the craze.
Now, the fever has come to Asia. In what seems like the blink of an eye, scores of Asian companies have transformed themselves into Internet companies or, at the very least, changed their names by adding a dot-com to them. This transformation has not been limited to small-cap stocks; large companies all over Asia are also jumping into the fray.
Final proof: Overseas Union Bank (OUB) is launching a standalone Internet bank in the latter part of this year. Singapore Press Holdings (the parent of The Business Times) is putting its content online. Korean giant Samsung is being touted as an Internet play through its many Net-related businesses from handphones to semiconductors.
And in what many see as the final proof of the arrival of the Internet age in Asia, Richard Li's Pacific Century CyberWorks (PCCW), a nine-month-old Internet concern with little revenue and no firm business plans, is about to take over the venerable Cable & Wireless HKT, the dominant telco in Hongkong.
In time -- by Internet measure, this means between six months and a year -- most of the Asian stock indices from MSCI to the STI will be heavily laden with Internet or Internet-related stocks. (PCCW, for example, will replace HKT in the Hang Seng and other indices).
In other words, the performance of these markets will be heavily influenced by the fast-shifting fortunes of Internet stocks. Suddenly, the valuation of Internet stocks has become important to Asian investors. Even those who do not go for Internet plays would be affected indirectly by the movements of the stock markets they invest in. As the Internet boom has just begun in Asia, most analysts in this part of the world are not equipped with either the knowledge or the experience to peg a realistic value on the fast-growing number of Internet companies here.
One of their most common mistakes is to use yesterday's business models to value tomorrow's companies. In measuring a content provider, for example, some would follow the rule of thumb prevailing in the United States and peg it at 500 times' revenue. Unfortunately, that model -- which is partly based on projected advertising revenue -- is already outmoded. Now that America Online has gobbled up Time Warner, content providers can no longer be seen as players in their own insulated industry, but as cogs in the much wider telecom/Internet/content field.
The same logic applies to other industries as well. OUB is launching an online bank. In the United Kingdom, Prudential's online bank Egg, though losing money, is valued at 4 billion (S$10.8 billion) and is heading for an initial public offering. If OUB's venture takes off, do banking analysts here know how to value the bank?
At the moment, this hardly matters as most investors who have gone into the Internet are more interested in hitching a ride on a rising tide rather than the individual fundamentals of the companies.
True value: But this could soon change. Today, there is too much money chasing too few Internet stocks, which drives up their prices. But Asian Internet companies are going the IPO way by the dozens -- at least 50 are targeted for Nasdaq this year alone -- and soon companies with a dot-com in their names will have to compete with each other for money.
When that happens, investors would want to have an idea of what the "true" value of these companies is. Can investment analysts deliver? |
