One mans opinion from the Microsoft Investor site:
investor.msn.com
@Home's Wall Street Glow Fades
After honeymoon, stock levels off, but it's still pricey
By Christopher Byron
MSNBC CONTRIBUTOR
@Home Network, the California-based cable modem company, went public in July and its stock quickly rode the wave of Internet enthusiasm to breathtaking levels from $10.50 a share to $30 by mid-October - but in the last four weeks the stock has given back much of its gains. Why?
For an answer, we need look no further than the stock's own super-exorbitant multiples. Initially, Wall Street seemed to ignore the multiples, but recently it snapped out of its slumber and realized they are way out of whack.
At its current price of around $22.50 per share, @Home carries a market capitalization of an incredible $2.6 billion. That may not seem like a huge amount of money for an Internet stock in the current Wall Street environment. But $2.6 billion is an absolute ton of money to pay for any company that brings in gross revenues of less than $4.7 million per year while running up losses of nearly 10 times that amount.
There is simply no other company on the current business scene that comes anywhere close to this extraordinary performance - a set of financial results that defy any form of conventional valuation analysis whatsoever.
You can't value @Home on the basis of its cash flow because the company doesn't have any. And you can't value it on the basis of its earnings because it doesn't have any of those either. About all you can do is determine its value as a multiple of its revenues and its balance sheet components - and by either of those measures you wind up with a company so astonishingly expensive as to suggest that the entire business is built out of gold bullion briquettes.
Wall Street is currently valuing the telecommunications industry at roughly two times revenues, a multiple that would make the whole of @Home worth maybe $8 million to $10 million, or less than the typical budget of a single Hollywood movie.
As an asset play, it comes off no better but still not great by any stretch. Wall Street is currently valuing telecommunications stocks at roughly 4.5 times book value, but most of those assets are actual, invested capital whereas most of @Home's assets consist of cash from its IPO - and a dollar of cash is worth no more than just that: $1. Take the cash out of the picture and @Home is left with only about $2 million of book value assets that warrant the multiple at all. Add back in the balance sheet cash and you've got a company worth $50 million tops.
With 116 million shares outstanding you're left, on this valuation basis, with stock worth maybe 50 cents per share.
Anything above that price represents blind faith - faith that a company built, on a single and costly technology, will be able to implement it steadily and rapidly, year-after-year, as the operating losses mount until that distant day arrives when the business reaches an inflection point and investors start getting their money back.
The lesson of the Internet is that such faith would be misplaced, for technology never stands still - in cyberspace least of all.
And, unfortunately, @Home is in a line of work in which technologies change almost daily. What was state-of-the-art six months ago, isn't even talked about today. Yet @Home needs to invest heavily, year-after-year - as if it were engaged in some huge engineering project (which, in a way, it is) - to develop the infrastructure to make its business work.
Too bad, for competing Internet-connection technologies are erupting everywhere, underscoring just how unlikely it is that @Home will ever get the breathing room it needs to establish itself in the market.
Best evidence of that fact came only last week when one of @Home's main competitors - U S West Communications, the Denver-based regional bell company - rolled out its own competing Internet connection service in Phoenix: a low-cost, high-performance system for delivering multi-G-force connections to the Internet over everyday telephone lines.
"We're going to be promoting this service heavily all over the place," says a U S West official. "People are nearly rioting for it already."
Until now, most high-speed data services to the home have involved either expensive upgrades to so-called "ISDN" or "T-1" line services. And that in turn has created the opening that @Home is trying to fill by promoting a service that uses the coaxial cable strung around the country by cable companies as the distribution and switching mechanism for Internet signals.
John Malone's TeleCommunications Inc., the largest cable operator in the United States, is @Home's Daddy Warbucks, and a number of other cable companies also have money in the business.
Time Warner and U S West Media - both big cable operators in their own right - have competing cable modem services of their own in the market, and they too rely on coaxial cable to carry signals into and out of residential homes. But all three systems require cable companies to invest in expensive "rebuilds" and "upgrades" in which whole systems are ripped out and replaced with bi-directional, interactive hardware ... from the customer's home all the way back to the head-end computers in the company's home office.
As a result, though the three companies have been aggressively promoting their service to subscribers, it looks likely to be many, many years before enough people sign up to make the effort worth the cost.
Meanwhile, U S West Communications has now popped up with its own competing service - dubbed MegaHome - that uses new kinds of switching and routing technologies to deliver ultra-high-speed data signals over everyday copper wire ... the stuff that already comes down from the phone pole, through your wall, and onto your desk.
In the Phoenix market, where MegaHome is selling for $39.95 per month, subscribers get 24-hour-a-day access at speeds guaranteed by U S West to be seven to 14 times faster than what is obtainable by a standard 28.8 modem. If you want to pay for the company's top-of-the-line offering - which sells for $125 per month, or less than the price of an ISDN line almost anywhere - you'll get a whiplash connection speed 25 times that of a 28.8 modem.
"It's the difference between taking a ride in a horse and buggy and hopping aboard a rocket ship," as my U S West source puts it. "The effect is just phenomenal. You just turn on the computer and bang, you're on the Web. No more waiting for pictures to paint across your screen or any of that. Everything happens instantaneously. It's the way the experience is supposed to be."
In short, though @Home is still a baby in the crib, this new technology - known to the cognoscenti as "digital subscriber line" service - is already nipping at its heels. And who's to say how many more new technologies - not even yet dreamed of - will be materializing tomorrow to make even DSL service obsolete? |
