Glenn:
<<<The valuations are all crazy. Valuations may seem sky high, but they're not
all crazy if you take the trouble to understand each company's market niche
and business model. The market is forever trying to move to a price that
discounts all a company's future free cash flow by way of a risk-adjusted
rate of return. Applying this imperative to an industry in hypergrowth is a
process fraught with risks of miscalculation that more mature businesses
don't present. Yet generous though reasonable assumptions about long-term
prospects can justify prices that may initially seem absurd.
Consider Yahoo!, whose ultralight business allows it to generate gross
margins of 88.5% versus 22% for online retailer Amazon or 34% for souped-up
Internet access provider America Online. While one could argue about how
"sticky" each company's customer base is (how high the costs are to a
customer for switching from one of these companies to a competitor), it's
clear that Yahoo! could eventually deliver extremely high operating profits.
Indeed, a 36% jump in revenues from the first quarter of this year to the
second led to a 151% surge in operating profits as margins leaped from 12.1%
to 22.3%. With the cost of online ads rising and overall online ad spending
growing, Yahoo!'s ad/commerce revenues should continue to soar, boosting
operating margins along the way.
America Online's ad/commerce run-rate is about $500 million a year. Though
Yahoo! is far behind AOL in that area, its reach seems comparable. Imagine,
then, that Yahoo! can do $1 billion in revenues by 2001 with Intel-like
operating margins of 50%. Assume a 35% tax rate, and the company would
deliver $325 million in net income. Divide that by 65 million shares and you
get $5 in earnings per share. Now paying 36 times guesstimated FY01 earnings
may not sound like a smart move. In fact, I wouldn't do it. But it's not in
any simple sense ludicrous. Indeed, it's about what Coca-Cola (NYSE: KO)
trades for today.
-- by Louis Corrigan>>>
Did you notice which of the three "tier 1" companies he cites earlier in the article, he then neglects to provide with an explanation of its business plan, market niche, or analysis of the stickiness of its customers??? |
