Is this article known to the thread? by Steve Harmon:
internet insight!
/e:harmon zero gravity/
'creating the ecommerce network
for entrepreneurs and investors'
e-harmon.com
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internet insight!
By Steve Harmon
CEO
/e:harmon zero gravity/
Leading Asian investment source Smart Investor, easily one of the best
magazines published on investing across Asia did this interview which we
want to share with you today:
Smart Investor: The rules have changed. Investing in Internet stocks is now
a different ball game altogether, and valuations are not always based on
traditional methodologies. Can you explain the main factors contributing to
the success of your selection process?
Harmon: The first thing we look for is the company?s business model. We like
companies that are viral, scalable, adaptable, flexible, and
well-capitalized. We look at the management team and the category the
company falls in. From the category, we ask ourselves how the company is
ranked. Is it first in its league or the fourth? Is it regional or global?
The percentage returns on our picks are secondary. We are looking at
long-term value. We select a stock not based on a six-month or one-year time
frame, let alone a one-day hit. Our long-term meter may span two to three or
even four to five years. We study how strong a company?s management is, its
market and how well funded the company is. Take AOL (America Online), its
market cap has grown tremendously, from US$3.5 billion to US$138 billion
today. Why? Its growth rate is in the triple digits annually. A measure we
use is the revenue growth over annual sales revenue growth.
SI: How has the top 10 for the year 2000 performed so far?
Harmon: It is still early to say. We are looking at the longer range. We
like companies such as Terra Networks (TRRA), SpyGlass (SPYG), Redback
(RBAK) and US Interactive (USIT). These companies have growth in the triple
digits. In Asia, we are big fans of Pacific Internet. In fact, the companies
I selected in 1998 are still those that I like to own. In 1998, I selected
Broadcom (BRCM) and AOL. I did not abandon them. As an investor, I would
like to own all of them. I am not a seller. Just imagine Yahoo! (YHOO) back
then did not have a business model that made sense. My hypothesis was that
if Yahoo! could capture just 1% of Internet advertising revenue in the US,
it would be huge. From the early days of US$3 billion, Internet ad revenues
are now north of US$400 billion. Yahoo!?s market cap went from US$1 billion
to US$100 billion in just four years. We are also fond of JDS Uniphase
(JDSU) and Internet service provider PSI Net (PSIX).
SI: Your views on Asian Internet companies?
Harmon: First of all, I would encourage Asian entrepreneurs to embrace some
of the US models, but not to copy them. Innovate, do things fresh. Go
through the whole venture capital (VC) process. The Asia experience seems to
indicate that companies are in a hurry to get a listing. They may get the
attention but the main drawback is they may not get efficient financing.
Asian companies are getting Internet-centric but they are not getting the
expertise provided by the true-breed VCs such as Asia Tech Ventures. VCs
know how to grow companies. In Asia, there are not a lot of good VCs around.
Efficient financing is important because the Internet is so exponential.
Geographical borders do not define the Internet. Asian and European
companies must realize that thinking small is not a good idea. Think global,
the opportunities are in the billions of dollars, ranging from US$1 billion
to US$50 billion. Interesting Asian companies are Softbank and Hikari
Tsushin. I also favor AsianInfo Holdings (ASIA), which has the China
government?s strong approval. Another private Asian play we like is
Alibaba.com.
SI: The investment universe for Internet companies is rapidly growing. With
so much "noise" generated by existing players, new start-ups and potential
wannabes, how do you go about filtering out the potential winners?
Harmon: We examine the landscape where there are business opportunities. We
have to take a panoramic view of the Internet battlefield. We are always
looking at the bigger picture. The degree of separation is few and far
between. For example who would have imagined Softbank buying Nippon Credit
Bank? In the digital world, you are just one step away from doing anything.
We check the company?s backers and assess the managementûs vision. Is this
the right time for this company? Back then, SpyGlass was working on Web
devices for a long time. How do you invest in virtual reality then? Now we
have Web phones and PDAs (Personal Digital Assistants). Timing is an
important element. To us, success comes from separating the signals from the
noise. We are on 24 hours a day, seven days a week, and we are in sync with
developments on the Internet. After six years, I?m quite used to the pace.
Instinct is the ultimate driver of an investment decision. George Soros and
Paul Tudor Jones they both won on instinct. Is RedBack Networks overvalued?
In my mind, heart and gut, it has a long way to go. We are investing in
growth, not earnings. In the past, we looked at price-earnings ratios and
this is a boxed experience. Today, focus on capital needs. The capital needs
a huge payback exponential. Petroleum is no longer your fuel, it is
electrons. Light is your fuel. Think outside the box.
SI: What is your measure for successful Internet stocks?
Harmon: The easiest matrix will be based on sales, gross profit margins and
market share. We always ask ourselves if a company is delivering a real
business or solving a need. Is the company chasing wind? The ultimate matrix
will include the management factor will they be able to carry the ball all
the way?
SI: You are credited with creating many new analytical tools for valuing
Internet companies. Can you share with us some of these tools and the
various financial measures/ratios you commonly employ in valuing Internet
stocks?
Harmon: For the e-Harmon matrices, the main premise for value lies in the
user. Some ratios we look at include market cap per user, market cap per
page views, revenue per page view, ad inventory sell through, conversion of
bandwidth to revenue, and traffic to revenue. The bandwidth is your pipe and
we assess how much of that you are converting into revenue. In the digital
marketplace, you have a choice of building a low-margin business or a
high-margin one like software/ASP. The foundation is similar as the pipes,
be it T1 or T3 are similar. Amazon.com, they had the digital pipe open and I
recognized that early. From a market cap of US$3 billion, they are now
valued at US$20 billion.
SI: Have these indicators/measure/ratios proven their efficiency in picking
the winners and identifying losers?
Harmon: In 1996, I compared Yahoo! and CNet (CNET) using market value per
user and market value per page view. Based on this, I realised Yahoo! had
more growth to go. Yahoo! delivered more page views and Yahoo! was only
double that of CNet back then. Another favorable factor to note was Yahoo!
having Softbank as a partner. Having a partner is critical. One company that
lost is Quarterdeck, an earlier licensee for Netscape?s Mosaic. That deal in
itself was good but they never built up a channel to distribute the product.
Netscape distributed its products over the Internet, and there were 20
million downloads in one year. The idea is not to go on the Internet if you
are not scalable. By being scalable, you are being customer-prepared. IE
Explorer, HotMail, Yahoo! Japan and Satyam Infoway (SIFY) are all scalable.
SI: What signals/measures should investors look out for, to indicate a sell?
Harmon: Watch out for hype. Be more critical and discerning. Do your
research. Do not chase the wind. If revenue slows down quarter-on-quarter,
something is wrong. Technology is shifting all the time; from narrowband to
broadband. For us, we look for new growth and sell the old. We look at the
price over sales to growth; we are measuring revenues. Look at the
management team are they able to take the technology shift?
SI: You mentioned one of your top 10 for 2000 is Singaporeûs very own ISP
Pacific Internet. Why?
Harmon: We like Pacific Internet as it has a lot of potential to grow into a
lot of new areas. It has multiple revenue streams; Web hosting, IT services,
transactional-based revenues, the backing of the government and deep
pockets. Pacific Internet is able to penetrate Asia very easily. It is an
established brand and has the ability to run a successful business. And
Pacific Internet is steered by a superb management team led by Nicholas Lee.
SI: What about competition in the form of free Internet access in Singapore?
Harmon: I would rather pay $20 to be left alone. Nothing is really free; it
is a misnomer. Marketing will support free access. I expect tiered services
to emerge. Free access is not a priority for corporations; they want
service.
SI: Vinton Cerf advocates buying companies that supply the "picks and
shovels" to the Internet industry. Which Internet sector do you prefer?
Harmon: The first Internet wave came from infrastructure, then came
software. The third wave is about e-commerce and services. I am an investor
in every layer. The concrete has been laid and I am there end-to-end. We
have classified the Internet into seven different sectors: hardware,
software, B2B, broadband infrastructure, access/hosting, e-commerce, and
international. Within these is another four to five sectors and 50
investment opportunities. We are a big fan of Warren Buffet. We "webtised"
that and our philosophy is to invest in what we know. Buffet was an astute
investor in consumer franchise. If you look at it, Microsoft is actually a
franchise. We are entering the Internet franchise era. Success comes from
providing a good service and having brand operating leverage.
SI: Some doomsday sayers are predicting a massive crash on NASDAQ this year.
Do you think valuations on NASDAQ are overly rich?
Harmon: Do not use the rear-view mirror to drive into the future. We are now
talking about light power. Light is the new benchmark, not horse or
petroleum power. Think digital. NASDAQ is a reflection of the shift into the
digital era. Sure, there will be corrections. More will leave the Dow and
invest in the future. Investing in technology is not a fad. I think NASDAQ
is undervalued. The industry is undervalued. The value of 400 of the top
Internet companies is about the same value as Microsoft, Intel and Dell
combined. Definitely, some companies may be frothy but that is where our
analysis comes in. The important thing is to understand the digital DNA.
Having that understanding is extremely rare. Masayoshi Son (of Softbank),
Richard Li (Pacific Century), John Doerr (of Kleiner Perkins Caufield &
Byers), David Wetherell (of CMGi) all understood this early. The Internet
represents a new digital economy. What we see as having zero gravity.
Commerce will be big in this digital economy. We are different from the gold
rush. The Internet is more of a shifting of business to another platform.
Back then, the gold rush was limited to one place in California. The
telephone was a new way of doing commerce. With the Internet there are a
hundred thousand ways of doing commerce. Everybody should have
Internet-driven revenues. If you are not an Internet company in 10 years?
time, you are dead.
Story courtesy of Smart Investor |
