A novel approach:
Looking deeper at the numbers
What a mindblowing concept LOL
From Briefing.com
Boston Chicken's Demise (Stock doesn't trade) : INTERNET INVESTORS TAKE NOTE! What, you say? What does the demise of Boston Chicken have to do with internet investors? They share the same theme. As we pointed out in our Stock Brief of October 7, 1998, the real problem with Boston Chicken is that no one was really looking at the proper numbers. Revenues were growing tremendously, but sales-per-sale were continually in decline. People tried it, but they didn't come back too often. Investors looked only at the strong revenue curve, and gave the company a Price/Sales ratio of 100 at the IPO (unusual then, common now), and eventually a Price/Sales ratio of 10, when Boston Chicken had its highest valuation of $2.5 billion on revenues of $264 million (1996). But, although revenues were skyrocketing, it was largely because brand new stores, launched with debt, were being opened as quickly as possible. Anyone can grow revenues quickly, if you have enough money to get started. Sound familiar? There are a lot of internet sites which have grown revenue quickly, because of marketing campaigns, acquisitions, or new product launches. Amazon.com (AMZN), for example, seems to have joined the "New Business Line" of the month club. In any event, the lesson of Boston Chicken was that you have to find the right number to look at, before judging that a business is a success. Revenue turned out to be misleading at Boston Chicken. It may turn out to be misleading for internet companies, as well. Boston Chicken's problems "came home to roost" quickly because they were debt-financed. You have to make timely payments. Internet companies are equity financed, and have more time. You can continue to lose money, until you run out. So far, when a net firm does run out, the market has been will to provide even more. But just as sales-per-store became more important than revenue for Boston Chicken, we think investors should start looking deeper into internet companies for an indicator of lasting success, especially for firms that lose money. Traffic numbers, page views, will mean nothing if they can't be monetized except as ads. What is the right number? We don't think there is a single one for all companies, but start looking for a way to measure repeat profitable business from an internet company's customer base. In the long run, that's what will count. When will a "day of reckoning" come for unprofitable internet businesses? We think the next two years will sift out a lot of firms. Those that lose will most likely get swallowed up by large cap, old line firms (Wal-Mart?, GE?), the way that McDonald's (MCD) snapped Boston Chicken last night, for what looks like nineteen cents for each dollar of debt, and nothing for holders of the common stock.
MZ |
