I didn't notice if this was brought over fromTMF.
I love the Case , 'Pretty Boy' line.ROFL.
New* Christopher Byron: The Internet Stocks Go Off Line
By Christopher Byron
Special to TheStreet.com
(Editor's note: In our continuing effort to expand our roster of
contributors, we introduce Christopher Byron, the tart-tongued commentator
who writes for several outlets, including our editorial ally, the New York
Observer. Byron has developed a reputation as a tough-nosed watcher of the
investing world. Each Thursday we will bring you his Back of the Envelope
column, which also appears in the Observer. If you have comments, questions
or feedback, feel free to email me at dkansas@thestreet.com. As always, the
opinions of our contributors are theirs and do not necessarily reflect a
view endorsed by TheStreet.com.)
*****
The real story in this convulsion isn't whether the 30 stocks that make up
the Dow are collectively worth 19 times current earnings, in contrast to,
say, the 14 times earnings at which the group has traded, on average, over
the past 70 years.
There's a lesson to be drawn from the wild stock market ride that has
carried the broad market averages all over the place in recent days:
Internet stocks stink.
As everyone not in institutional confinement now knows, it's been a wild
time indeed, with the 30 stocks of the Dow Jones industrials dropping 1063
points, or 12.3% of their value, in just four trading days -- one of them
the sickening 512-point drop on Aug. 31 -- then recovering all of that,
plus another 475 points, in the five trading days thereafter.
Yet the real story in this convulsion isn't about P/E ratios. The real
story here is what investors have at last begun to realize regarding the
real worth of many of the junky initial public offerings in the Internet
sector: basically nuttin'.
This is something that many officers, directors and other insider investors
in the sector have known for quite some time now, and as we'll see in a
minute, many began bailing out of this overheated group in the weeks
leading up to the current collapse, registering an astounding $594 million
worth of insider stock for sale since May. First, however, a bit of
perspective on the market's harsh judgment about the financial strength and
staying power of the companies themselves.
We've been flogging this horse here at Back of the Envelope for well over a
year now, arguing to multitudes of the deaf that Wall Street's Internet
initial public offering deal machine -- basically just a fee-generating
racket dominated by a handful of investment firms with well-cultivated ties
to some dim-bulb mutual fund managers -- was a train wreck waiting to
happen. Now it's happened.
For evidence we need look no further than our own aptly named New York
Observer Internet Suckers' Index, which tracks the market performance of
some 31 stocks in the cybersector -- nearly all of them IPOs that came to
market with eye-popping hype (and preposterous valuations) in the last two
years. We started this index last winter as the speculative bubble in
Internet stocks began to grow, and we've been adding new stocks to it ever
since to maintain as comprehensive a picture as possible of what's actually
been going on in this fast-changing sector.
And here's what the picture shows regarding the events of the last month --
with particular emphasis on the last week of August: While the broad market
averages, as reflected in the Dow industrials, have slumped 14.8% from the
Dow's all-time high of 9337.97 on July 17, the Observer's Internet Suckers'
Index has crashed by 29.6%, barely recovering at all on Sept. 8, when the
Dow spurted 380 points, or 5%. In fact, the Suckers' Index rose by exactly
nothing that day.
But don't fret, because what we're seeing here, folks, isn't bad news at
all. It's actually good news: evidence that the wildly overinflated
Internet sector -- financed recklessly and haphazardly by fee-obsessed Wall
Street investment banks -- has returned to earth with a thud. This isn't
panic selling, it's a forced downward revaluation of prices as investors
once again begin doing what they should have been doing all along: looking
for actual value in what they're purchasing before handing over their
money.
Necessarily, the carnage has been severe. America Online (AOL:NYSE) is by
far the largest company in the sector, with nearly $2.3 billion in revenue
and $65 million in earnings over the last 12 months, and -- until recently
-- a berserk valuation of 129 times estimated 1999 earnings of 99 cents per
share. This for a company with a long and well-documented history of
managing its earnings through accounting gimmicks ranging from capitalizing
marketing costs instead of expensing them, to trying to expense the
purchase price of acquisitions as "in-process research and development"
when the costs should be capitalized instead.
As a result of the former abuse, the company announced in October 1996 that
it would take a charge of $385 million, totally wiping out all profits the
company had made since its founding more than a decade earlier. Now AOL is
quarreling with the SEC over whether to capitalize or to expense in-process
research and development costs, and as a result has not yet released full
financials for the April-June 1998 period. In any case, the rout in
Internet stocks has carried AOL from a high of 140 1/2 on July 21 to 95 1/4
on Sept. 8. That's a 32% drop in barely six weeks -- the steepest such drop
for the stock, in so brief a period, in the company's history -- wiping out
nearly $12 billion in value from the portfolios of those who held shares in
the company.
One such holder was -- and is -- AOL's chief executive, Steve Case, a
business-world pretty boy who likes to bask in his fame in an aw-shucks
sort of way, posing for Gap (GPS:NYSE) khaki ads when the spirit moves him.
The slide knocked $99.6 million off the more than 2.2 million shares of AOL
that Mr. Case held at the start of the year.
But don't cry for Pretty Boy. According to company filings with the SEC,
between January and the end of August Mr. Case sold just about 1 million of
those shares on the open market, pocketing what looks to have been
somewhere around $81.2 million in the process. According to an SEC filing
on May 29, $33.7 million of the haul came in May alone, by which time AOL's
share price had already climbed to more than double its January level. All
together, AOL insiders registered to sell a stunning $191.7 million during
the May-August period.
In a similar spirit, consider the blood that's been shed in the current
rout by holders of Amazon.com (AMZN:Nasdaq). This company went public in
May 1997 at a split-adjusted price of about 10 and soared to a peak of 143
3/4 on July 7 on nothing but hype, hope and games-playing by day-traders.
By that time, of course, it was obvious that investors were making a big
mistake. The run-up was being artificially fueled by day-traders who were
buying, selling and then repurchasing the same shares over and over again
each day, creating the appearance of demand.
In the nine weeks since then, Amazon.com's price has also returned to
earth, dropping by 36% to a Sept. 8 closing price of 92 1/4. In the
process, nearly $2.6 billion of illusory shareholder value went up in
smoke. Who got hurt? Not the corporate insiders, officers and early
investors like Amazon.com director Tom Alberg, who filed papers with the
SEC on Aug. 6 to sell 30,000 shares of Amazon.com for $3.13 million.
Between May 1 and Aug. 18, 16 such individuals filed papers to sell $65.7
million of their stock in the company. Some vote of confidence!
Did these cut-and-run artistes maybe think that, at an average price of 88
during the period, Amazon.com might have gotten just a tad ahead of itself?
My analysis of a recent announcement of me-too IPO by Barnes & Noble
(BKS:NYSE) suggested that Amazon.com is probably worth somewhere around 65.
Reasonable people might quarrel over whether 65 or 92 1/4 is the fairer
price, but with Amazon.com having now retreated decisively from its
nosebleed level of 143 1/2, at least we can agree that the price is finally
returning to a defensible level.
The list goes on and on. There's Yahoo! (YHOO:Nasdaq), the directory
company -- down by 18.5% to 84 5/8 since July 7, even as insiders have
filed bailout papers since June 1 to the tune of $27 million. Or consider
CNet (CNWK:Nasdaq), a Web site operator: down by 40% from its peak of 74
1/2 on July 23. Bailout honor roll? More than $32.5 million in insider
stock sale registrations since May, including an $8 million planned sale by
Chairman and Chief Executive Halsey Minor on July 29. Or what about CDNow
(CDNW:Nasdaq), which sells music CDs over the Internet? This pipsqueak
operation, which logged a mere $33 million in 1997 sales while erupting in
a volcanic $27 million worth of losses, crashed from a high of 25 5/8 on
July 21 to a Sept. 8 closing price of 9 7/8 -- a sickening 62% slide that
wiped out $257 million of the company's market value in little more than a
month. Meanwhile, company insiders headed for the exits, registering to
sell $7.6 million of stock, representing 5.23% of all the shares
outstanding.
This could go on all day, but there's really only one matter left to
discuss: Who's to blame for starting all this tulip-time waltzing in the
first place? For an answer, look no further than the gang on Wall Street.
By slapping "high-risk" warnings on their deals, white-shoe firms like
Goldman Sachs and Morgan Stanley Dean Witter -- both of which plainly
should have known better -- have felt justified in cranking out worthless
deals that never should have left the portfolios of the venture capital
firms that dreamed them up. But out the deals have come, like the march of
buckets and broomsticks in Fantasia, and now they're all struggling to stay
afloat in a business where the profits are scarce and where capital may
soon be growing scarce, too.
These investment firms are playing a huge and cynical game. They know
better than anyone that companies like GeoCities (GCTY:Nasdaq) (which
Goldman Sachs took public earlier this month at $17 per share) and
Broadcast.com (BCST:Nasdaq) (which Morgan Stanley helped underwrite back in
July) are really nothing but financial junk deals with no hope of ever
standing on their own as self-sustaining enterprises. Indeed, the
registration statements for both IPOs say as much flat-out, warning
investors that neither company has any expectation of earning any "net
income for the foreseeable future."
These deals are being brought to market not because they make financial
sense, but because the firms get to rake in fees by exploiting the phony
demand for such IPOs that have been ginned up by day traders. All of which
explains how Morgan Stanley and its co-underwriters bagged $3.6 million in
fees for raising a mere $33.9 million on behalf of Broadcast.com, which
came to market on July 27 at 15, jumped within a week to 63, then keeled
over. On Sept. 2, it was selling back at less than 42 -- a slide that had
wiped out 9.5 times more value than was invested in the company by IPO
shareholders in the first place.
Ah, this whole thing is making me sick. These deals stink. And at the end
of August, the market finally began to smell the rot.
*****
Christopher Byron tracks the financial markets for several
media outlets, including the New York Observer. He appreciates your
feedback at cbscoop@aol.com. |
