WSJ/Heard on the Street on Amazon:
Investors Wonder How High
Amazon.com Will Climb
By LESLIE SCISM and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
Is Amazon.com worth more than Barnes & Noble and Borders Group combined?
Some investors Tuesday were questioning how much higher the valuation for the Internet
bookseller could keep going. The stock Tuesday dropped 17 3/8, or 12.5%, to 122 1/8, after a
recent sharp climb that left some market watchers agape.
Even with Tuesday's drop, Amazon.com is up a tidy 164% since June 8, the day before many of
the Internet stocks started climbing in the wake of the seal of approval stamped on Web-related
firms by the first of two important big-media investments in the group, an infusion in CNET by
General Electric's NBC division.
Post-tumble, Amazon.com's stock-market value still stands
at $5.7 billion -- by itself nearly as much as the combined
market value of Barnes & Noble (at $2.95 billion) and
Borders Group (at $2.94 billion), the two biggest chains of
booksellers with actual brick-and-mortar bookstores. On
Monday, Amazon.com's was actually greater than the other
two combined.
Indeed, Amazon.com isn't currently generating profits, and the $663 million in 1999 revenue
estimated by Prudential Securities is less than one-tenth that of its two rivals. Prudential
estimates Barnes & Noble will post 1999 revenue of $3.7 billion, and Borders will register $3.1
billion.
The price action in many Internet stocks has some market observers scratching their heads.
Doubleclick, for example, has risen 77% since June 8, and Yahoo! has risen 75%. "Something
doesn't seem right," Prudential analyst Amy Ryan wrote in a note to clients Tuesday about
Amazon.com. "Isn't that amazing?" the analyst said in an interview, adding: "Let's just say that
valuation parameters are difficult to formulate."
Methods being used in the Internet sector range from estimating -- or is it guessing? -- revenues
and profits much further out in the future than is customary, all the way to extrapolations based
on current marketing expenditures or number of Web-site users.
Many Internet stocks are "being valued on a wing and a prayer," said Lise Buyer, an Internet
analyst who is joining Credit Suisse First Boston from Deutsche Bank Securities. "There's
tremendous potential in what companies leveraging the Internet can do, but the current valuations
of many of the highfliers suggest that there's only upside -- there's no risk involved."
Clearly, the events driving some stocks in the group are baffling. Consider Lycos. It shot up this
week on news that it plans to split its stock. Such a split has the effect of making a stock "more
affordable" to those who prefer lower-priced stocks to higher-priced ones, but, beyond that,
Lehman Brothers accounting expert Robert Willens said such a move "has absolutely zero effect"
on the economic value of an overall enterprise.
One of the most popular valuation methods is to look at a multiple of projected revenue. Andrea
Williams, an analyst at Volpe Brown Whelan & Co., takes the stock-market value of a company
and divides it by her forward-revenue estimate. For Amazon.com, that number is about 9.2,
based on Ms. Williams' 1999 revenue estimate of $649 million and Amazon.com's recent market
cap of about $6 billion.
But what does that multiple mean? "That's a good question," Ms. Williams conceded. Even
when she compared the multiple with those of other on-line retailers, she said "it doesn't
necessarily mean anything."
Although Ms. Williams stands by the revenue model as one good way to value fledgling
companies that are still bleeding red ink as they attempt to build market share and brand names,
the methodology could, she acknowleged, discourage them from developing the financial
discipline to turn profits.
It may also lead to another problem: Companies artificially inflating revenue because they are
being judged solely on future sales, said Phil Leigh, an analyst at Raymond James & Associates
Inc. "We have avoided the use of the revenue model because we feel it can be abused," he said.
Instead, Mr. Leigh starts by estimating a company's annual, per-share earnings in, say 2002.
That's no small feat in itself.
Meanwhile, other analysts have devised models that rely on the number of users or subscribers
that the companies are attracting. One shortcoming of these methods is there's a lot of
controversy about how subscribers are counted.
Still, others are coming up with even more exotic leading indicators, like the
"marketing-efficiency index" created by analyst Miles D. Russ of Wheat First Union. In a
nutshell, his thinking is that the more a company spends building its brand name, the more it will
later earn.
Mr. Russ said that spending on sales, marketing and administrative initiatives can be predictive
of future revenue growth, and that "this index is closely correlated to the movements in share
price of Internet companies."
So, have valuations gotten out of hand?
Morgan Stanley Dean Witter analyst Mary Meeker wrote in a December report, "We have one
general response to the word "valuation" these days. And it's "bull market." We have been in the
technology sell-side trenches for about a decade and, simply, we have entered a new valuation
zone."
But Ms. Meeker says the new zone warrants new valuation approaches. "The world has never
experienced as rapid/disruptive a commercial evolution" as the Internet, she wrote. Among other
stocks, she likes Amazon.com and rates it outperform.
Some analysts attribute some of Amazon.com's recent gains to a combination of a "short
squeeze" and heavy participation by retail investors. Short sellers, who sell borrowed shares in
hope of replacing them with cheaper ones if a stock declines, were taking a risk in shorting the
stock to begin with, because it has an unusually small "float," or number of shares available for
trading, analysts said.
Most of Amazon.com's shares are held by insiders who don't trade them publicly. But with the
recent run-up, many short sellers have been forced to try to pay up for the scarce supply of
available shares to cover their positions. As of mid-June, Morgan Stanley's Ms. Meeker
estimates short sales amounted to 80% of Amazon.com's float.
Meanwhile, individual investors have piled on, some lured by Walt Disney's big investment in
Infoseek, announced June 18. Many of them trade on-line and use the very Internet services
they're investing in. The evidence for their participation, analysts say, is the high percentage of
volume done in small lots of 100 or 200 shares.
Back to the fundamentals. Keith Benjamin, who covers Internet companies for BancAmerica
Robertson Stephens, values the stocks based on his projections of future earnings. He
anticipates that most of the companies he follows will be profitable in the next two to three years.
For example, Mr. Benjamin calculates that Sportsline USA will begin to turn a tiny profit in
1999, but he places a $60-a-share 12-month price target on it based on his projection of a $1.20
a share profit in 2001. In effect, he is applying a high-growth multiple of 50 times earnings to
profits that won't materialize for three more years.
By that yardstick, the stock's current price of 36 almost seems reasonable, although the profits
are far away. Indeed, Mr. Leigh said Raymond James estimates Sportsline's per-share net will
hit $3.25 a year later, in 2002. By his methods, that justifies a current price of around 45.
This obviously requires both analysts to peer deeply into their crystal balls. "You might say I'm
crazy to look out that far," said Mr. Benjamin, "but I'm trying." |
