I find the relatively depressed prices of Internet broker stocks relative to the astronomical valuations of AOL, Yahoo, On Sale and Amazon very helpful in creating a benchmark from which to track future internet stock valuations.
While many may disagree with me, I believe AOL is the most fundamentally valued because of the tremendous revenue stream generated by 10 million plus users at $22 a month. Granted, profit margins are slim but the cash flow generated by the AOL franchise should not be dismissed.
While Yahoo is poised to become the AOL of the Web, I find its position to be much more tenuous. Yes, Yahoo has tremendous brand equity right now but I personally favor the brands of traditional media sources (ie CNN, ESPN, local newspapers). And, the open nature of the Web makes it very easy for new sites to compete for people's eyeballs. Yahoo will do well but it will take years before it business ever supports the stocks current valuation.
The comparison between strictly e-commerce sites such as E*Trade and Amazon is more puzzling. Everything I read indicates that investors are going on line in droves. The account growth both in users and in dollars at E*Trade over the past 2 years is incredible. However, the valuation of E*Trade as a business has already been discounted significantly due to the acknowledged threat of competition from other online brokers and from traditional brokers. Nevertheless, E*Trade will make a good profit this year and is on track to grow its business at a strong rate in the years to come.
Meanwhile, while both Amazon and On Sale are growing revenues very rapidly, neither business plans to report profits in the near future. And while Amazon and On Sale are the leaders in their e-commerce sector, both businesses face competetive pressures from both on line businesses and from traditional retailers and services. Yet, investors are very comfortable driving these company's stock prices through the stratosphere.
What gives?
Either E*Trade is extremely undervalued or Amazon and On Sale are extremely overvalued. Ultimately, e-commerce stocks will be valued similarly to their traditional industry counterparts. Yes, the internet provides greater scales of efficiency. But since every company will be able to do business on the internet, no one company will have an advantage. |
