Carl:
I disagree for all the reasons stated. The business plan of the biotechs and the internuts are not strictly comparable. The biotechs are reliant on fixed R&D programmes which yield zero income until they produce an approved product that can be sold or licensed. Typically these R&D programes take years, and cannot be abandoned or changed easily. They may never produce an output. The company cannot escape the need to burn substantial cash to fund the R&D.
An "internut" company purports to spend cash to build out infrastructure and brand image which will leverage increasing revenues in a "new" economy and into expanding markets. The date of profitability is projected to be anywhere from 3 months to X years. Typically, profitability is projected in 2-3 years. (In NETP's case it is 1 year according to analysts and six months according to me). Unlike the biotechs, the internuts have already begun to generate sales even before they came to market, although a feature of the "bubble" is that they came to market rather earlier than would normally be the case. In other words, they rely on the market to provide quasi-venture capital funds by buying the future revenues. Unlike the biotechs they are not boxed into rigid R&D programmes for a number of years. Unlike the biotechs they are not faced with the possibility of their expenditures producing zero revenues.
Part of the difficulty with such a comparison is that you use the term "internut" much more loosely than the term "biotech". For example, you are referring to NETP as an "internut" in the same breadth as you refer to Amazon and BYND. I find them as different as chalk and cheese.
NETP took advantage of the internut bubble to come to market early and raise capital. Some of its early customers, still representing 24% of its revenues, were dot-coms. Despite the scare stories circulated about dot.coms, none of NETP's dot.coms customers have gone under yet - although some may undergo some form of rationalisation. As the NETP average selling price has risen from $130,000 a year ago to $340,000 now, NETP has moved out of the range of some dot.coms and others have lengthened their buying cycle. The need for dot.coms to improve their ROI should favour NETP whose strong point is that an installation pays for itself in 6-9 months and there is an immediate increase in gross margins.
dot.coms in cash-flow difficulties or with a weak business models have many more flexible means of surviving than biotechs in trouble. They can cut their budgets and tweak their business plans in the way I described and biotechs cannot do that. (We will have to agree to disagree about Amazon. Again you distort my comment - but that's your privilege). Also they can diversify their business more easily. Like biotechs, they can merge or sell themselves.
If some of the dot.coms go under there is no direct loss to NETP. It has already collected its fees from them. Any business a failing dot-com has generated will become the property of someone else - a more efficient competitor, or another type of company. The business does not evaporate. NETP will sell to the winners as well as to the losers.
There is a renewable and expanding supply of dot-coms in the US and throughout the world. There are already indications that outside of the USA, new dot-coms are more conservatively structured than the first generation of American dot.coms. NETP could go on selling to dot-coms until kingdom come. No doubt it will concentrate on attracting those that can afford its high average selling price, as well as the "budget" dot-coms which would start with the NETP ASP products. NETP is at very little risk in the sale of ASP products as the cost of sale is relatively low.
76% of NETP's revenues come from customers other than dot-coms. If every company which is going to profit from the general expansion of electronic transactions - espescially by the net, call-centres, e-mail, ad targetting and knowledge management - is going to be labelled as an "internut" then to be consistent you have to include LU, CSCO, MSFT, SAP, CA, ORCL and a lot of others. NETP fits better with them than with AMZN or BYND. The kind of comments you make about NETP's valuation used to be made about them a couple of years ago.
Your prognosis for NETP share price is interesting. Nobody can prophesy what people will want to buy or sell in 3-6 months - let alone one year or more. So your guess is as good as mine. I notice you give no consideration to the possibility of buy out. Given your assumptions, I am curious why you would have bought NETP last year when its business model was weaker, its dependence on dot.com revenues greater, its sales and staff 300% less than now. Where you just taking a gamble on the "bubble"?
If you take your method of valuation to its logical conclusion you ought to reduce it to the value of its cash per share (less any cash reserved for preferred shareholders and bankruptcy proceedings). Why would you accord any value to future earnings of a company making a loss? Seriously, whether you like it or not, the market places a value on future earnings. It takes time to decide which companies future prospects are better and more reliable and as confidence grows and the visibility of the future grows, then valuation grows.
The market is not always right and is subject to fad and fashions. For about 4 months it has lost its appetite for internet related stocks - but it had that appetite for 2 or 3 years. A few times before it has temporarily lost the appetite and regained it. I would not bet on that appetite not returning, even though with a more educated palate. Do not underestimate investors need and greed for quick profits.
The danger to NETP is not from abstract theories of reduced valuations, but from slowing growth in its revenues. The business model is geared to sustaining high growth through the increase in its direct sales force and the expansion of indirect sales and sales through its own and third-party ASPs. The growth in the direct sales force has not been as rapid as it ought to have been - although the company says it is on target to double it from 1Q to 4Q. The indirect sales through partners has grown less quickly than I anticipated when I first invested - although it has outgrown the analysts' projections. |
