From the WSJ -
New Economy, New Math?
Forecast Raises QXL.com
By GREGORY ZUCKERMAN and JESSE EISINGER
Staff Reporters of THE WALL STREET JOURNAL
QXL.com more than doubled Thursday to nearly $52 after an analyst predicted that shares of the Internet auction site would soar to $333 in two years.
Who was this influential soothsayer?
A 28-year-old analyst who only a few years back was installing telephones and fixing computers.
It is only the latest example of the new research game on Wall Street: An unknown analyst initiates coverage of an Internet stock with an eye-popping price target. The stock briefly soars. The analyst gains fame and potential fortune. But investors sometimes get singed.
That is what happened after Thomas Bock of SG Cowen sent American depositary receipts of London-based QXL into the stratosphere. At one point, investors had bid up the ADRs as high as $117.375 on the Nasdaq Stock Market amid the buying frenzy. Translation: Investors who bought at Thursday's peak were down 56%. By day's end, about 6.7 million shares traded hands, compared with QXL's average daily volume of 14,700.
It all added up to quite a day for Mr. Bock, who became an analyst at Cowen just a month ago after a stint as a junior associate at a rival. It was Mr. Bock's very first stock recommendation -- a "strong buy," natch.
Even bullish analysts were agape at the call. "I have to say there can't be any sane justification for such a share price target," says Derek Brown, who covers QXL for Robertson Stephens.
Mr. Bock says his forecast is based on the view that QXL's leading position for online auctions in Europe will enable it to become the eBay of Europe in a few years. "Europe is quite nascent compared to the U.S., and online household penetration is growing fast," Mr. Bock says.
"We're not focusing right now on earnings or even revenues," he says. "We're looking at the size of the market and their defensible position in it." QXL had revenue of $2.5 million in the fiscal third quarter ending Dec. 31 and pretax losses of $61.4 million.
Actually, Mr. Bock doesn't believe QXL will become profitable before the end of 2003 -- at the earliest. He acknowledges there is more competition in the European auction sector.
The moon-shot prediction is just the latest in a recent trend. In 1998, Henry Blodget, an analyst at the time at CIBC Oppenheimer, nearly doubled his price target for Amazon.com, then trading at $230 a share, to $400. Just a few weeks later Amazon topped the target, putting Mr. Blodget on the map. He has since joined Merrill Lynch. (Amazon's shares have since split; the stock finished Thursday at $64.25.)
But other high-profile recommendations haven't yet panned out. PaineWebber analyst Walter Piecyk put a $250 long-term target on shares of Qualcomm earlier this year. The stock now trades at $139.125, however. (The prices are adjusted for a 4-for-1 stock split.)
All these headline-grabbing recommendations worry some investors. "If an analyst wants to play in the Internet game, the only way is to make semi-outlandish calls to get attention from the media and investors," says Michael Holland, who runs Holland & Co., a New York investment company. "Forget being wary-investors should remember 'terrible Tuesday,' " when highflying tech stocks tumbled earlier this week.
Mr. Bock insists his recommendation wasn't a stunt to make a name on Wall Street. He says it was the result of an extensive research effort. "We did a 28-page analysis of the company, the marketplace and where they will fit in," Mr. Bock says. "The opportunity is very big, and QXL should be a core holding in your European Internet portfolio."
A two-year price target is unusual; most analysts have one-year targets. But Mr. Bock says he came up with his valuation by looking at where eBay, the U.S. Web auction company that is the world leader, traded two years ago. For the fourth quarter of 1997, eBay had sales of $2.6 million; for the fiscal third quarter ended Dec. 31, QXL had revenue of $2.5 million, Mr. Bock says. Now eBay has a market capitalization of around $25 billion. So he just worked backward. QXL's market capitalization is about $3.75 billion, up from about $1.75 billion on Wednesday.
"The argument is that QXL is about two years behind eBay. But relative to the market development, it's on par with eBay," he says. He adds that the European market for auctions is likely to be bigger than the U.S.
His rival at Robertson Stephens, Mr. Brown, contends that QXL, while promising, doesn't deserve to trade at a premium to eBay. EBay has about 750,000 registered users in Europe, Mr. Brown says; QXL has around 500,000.
It seems that Mr. Bock found the attention from Thursday's recommendation a tad overwhelming. A 1993 graduate of Amherst College, he majored in political science and didn't take a single economics course. He came to New York to work as an information-systems specialist. "Basically, I was a tech guy, everything from fixing your computer to installing your telephone," he recalls.
Until February he was an associate analyst at PaineWebber before joining Cowen as a full-fledged analyst.
Cowen was one of four co-managers helping to bring QXL public at $16.15 in October of last year. But Mr. Bock and Cowen officials say their role had nothing to do with Mr. Bock's towering price target. "Our equity research is unimpeachable, beyond reproach," an Cowen spokesman says.
Some folks were especially overjoyed by Thursday's runup: QXL's original investors. Next week these investors, including venture-capital firms, will be able to sell QXL shares under terms of the company's "lock-up" agreement related to its initial offering, according to a QXL spokeswoman. But the company's management won't be able to sell shares just yet.
Yes, investors who bought QXL shares near their highs Thursday could feel a bit abused. But Mr. Bock says to have faith. QXL, which runs 11 online-auction sites in local languages and local currencies, has a great future, he says.
"It's a 24-month target that we put on the company. We believe in them," Mr. Bock says. "As they start executing their strategy, there's upside."
Still, eBay is expanding quickly into Europe, especially in Germany. And while QXL has more users than its European rivals, other online-auction companies in Europe, including Ricardo.de AG and iBazaar, are growing quickly. "The market in Europe is growing and could support a couple of big players," Mr. Bock contends.
Meanwhile, eBay is profitable, and Mr. Bock acknowledges that big profits are a long way off for QXL. While Mr. Bock says QXL could become profitable in late 2003, "we're looking at very little in earnings" at least at first.
Some of Thursday's stock surge seemed to stem from confusion over QXL's 3-for-1 stock split that took effect Thursday, traders said. Some investors appear to have viewed Mr. Bock's presplit target of $1,000 a share as a post-split target.
Some analysts say the stock's rise underscores the power a single analyst has in today's charged stock market.
"Aggressive price targets get attention and sometimes can be self-fulfilling," says Scott Sipperelle, co-founder of Midtown Research in New York. While Mr. Sipperelle didn't know the details behind QXL's rise, he says: "The question is why investors listen." |
