Mark "I'm mostly a TA guy" Fowler:
Mark, you're a good guy, you've made a killing, stick to the TA or you may hurt yourself with FA attempts.
Barron's:
Finally, they rushed back into the stocks they had so shamefully dumped,
tears of happiness and sorrow welling in their eyes (they were happy they
were getting rich quick again, sad because they could have gotten even richer,
quicker). And it was at that moment investors fully saw the light and vowed
never again, come hell or high water or even the collapse of Brazil, to
abandon risk.
No better evidence of their good faith and fidelity than the action of the
Internet stocks. Free of such encumbrances as sales and earnings, these
stocks have taken wing. Their swift and sure ascent into the stratosphere, their
cosmic market caps, their valuations so extraordinary that they can only be
measured in light-years might once have daunted investors.
But that was before risk became the same kind of four-letter word as "love"
and "rich." In the new paradise, investors understand that stocks that are
unbelievably high can only go higher. And every day proves they're right.
There are always a few souls, of course, who out of sheer orneriness refuse to
enter heaven's gate. They profess to see a chimera where all the rest of the
world sees only bounty. Such a dyspeptic dissident-alas, otherwise an
obviously estimable person-is a money manager who on rare occasion
conveys his thoughts on investment things to us, thoughts that for the most part
we've found sensible, even insightful.
Actually, he's a moonlighting money manager, whose "day job," as he puts it,
is running a company with Internet "involvement." His reluctance to be flamed
by family and colleagues, all of whom draw considerable substance and
sustenance from that involvement, is why he begs anonymity.
What rankles him and moved him to communicate with us is that he knows in
his bones that the "Internet mania" that has lifted most of the sector to "beyond
absurd valuations" could well rage higher but, as night follows day, is destined
"to end badly."
He sympathizes with the fundamental cause of the mania, namely investors'
feeling that "the Internet ranks with the steam engine, steel, electricity and
semiconductors" as a seminal technological development. A view, he
confesses, he mostly shares. But nowhere is it ordained that the Internet's
presumptive status and shining promise will rub off on the companies whose
shares are the meat of the current mania.
Quite the opposite, the money manager contends (which is our sentiment
exactly). Before offering the gist of why he's so adamant on that score, we
want to pass along one of his observations on the crowd pouring madly into
the Internet stocks. This pulsing population is large and widespread, he notes,
its ranks swelled by "tens of thousands of 29-year-old computer
programmers" working for companies across this broad land, yeasty lads and
lassies pulling down $60,000-$80,000 a year, who "use the Internet heavily
and spend at least an hour a day buying stocks" via their online brokerage
accounts.
This vast, venturesome cohort, in effect, is an enormously active group of
dedicated momentum investors, piling resolutely into Internet stocks for the
good and sufficient reason that, as one of his day-job employees who is a
certified member of the crew explained, those stocks "double every three-four
months."
It's hardly a secret, our communicant sighs, that "momentum investing can
become self-fulfilling for surprisingly long periods, especially when there is
wide public participation" in a stock or a group of stocks. As witness the
lengthy as well as awesome levitation of the Web shares.
What makes the valuations of Internet stocks outlandish, he asserts, is that the
"business models" for practically all the current online companies simply don't
allow for the profitability or sustainable business edges that could come even
close to justifying those valuations. And that's after due recognition of the
great advantages that Internet outfits command, unburdened by costly sales
forces or heavy inventory.
Certain computer-related activities -- PC operating systems, for one,
software applications, for another, CPUs, for a third -- are natural
monopolies, making possible, even inevitable, the rise and dominance of a
Microsoft or an Intel. In telling contrast, our moonlighting money manager
points out, the Internet is virtually an open door: Barriers to entry for
Websites, tool sets, even service providers "range from low to extremely
low."
This easy-access, almost come-hither, quality of the Internet is, he avers, "one
of the things that make it so important." But it's the very stuff "of disaster for
investors."
The tripod of online business -- subscriptions, advertising and
electronic-commerce (e-commerce, to lapse into the cool) -- will enable
many an Internet company to rack up impressive revenue growth, at least
over the near term. But for all save a few, margins pared down to
razor-thinness by the unrelenting grind of competition assure that profitability
remains "a mirage on the desert horizon." And that applies even to an
Amazon, for all it's a killer in every category it enters.
This firm forecast leads the money manager -- who, remember, feeds
handsomely off the Web and considers it an epical technological event -- to
conclude that, when the final count is in, "The serious money will be made by
those selling stock in Internet companies."
Not all Internet stocks, to be sure, are in the red. That is not necessarily a
good thing, since it allows those few exceptions to be subjected to
conventional methods of analysis. More specifically, they can be awarded
P/Es -- price/earnings multiples -- instead of P/Fs -- price/fantasies multiples.
Fantasy has served their shareholders so well, one wonders what possesses
the handful of companies so determined to tempt fate by exchanging fantasy
for profits.
Yahoo is a case in point. As its many fans can happily attest, the stock has
been darn near what our pal Peter Lynch reverently calls a 10-bagger, rising
from a '98 low of $24 a share to its current eminence of around $220, and the
year, of course, isn't over. Yahoo, a model of how to succeed in the stock
market without benefit of earnings, has begun to operate in the black, although
an inconvenient second-quarter deficit will likely keep full-year results from
showing a profit.
By next year, Yahoo is supposed to post 60 cents a share in earnings. If so,
according to our trusty calculator, the shares are selling at 366 times
projected earnings.
Admittedly, that's somewhat above the market multiple. But while it's not the
sort of thing that would faze a red-blooded, stout-hearted, true believer in the
glory of the Internet, so ample a P/E conceivably could cause investors less
endowed with imagination to find the stock a mite too rich.
In the interest of preventing such a tragedy, we strongly urge any investors
who are unaccountably distressed by the size of Yahoo's P/E to use other
measures of value that are guaranteed to reassure them. Assume, as analysts
do, that the company will garner revenues that will run a tad under $200
million this year, something more than $300 million in '99. Okay?
Now, a rough estimate of Yahoo's market capitalization is $25 billion. The
stock is thus selling at approximately 120 times this year's revenues and
around 80 times next year's.
What this means simply is that Yahoo stock currently is discounting 80 years
of revenues. At first blush, 80 may seem a few too many years to discount.
Our considered advice to the Yahoo-lorn or the Yahoo waverer is ... don't
rush to judgment.
For 80 years is long-compared with what? Not long compared with geologic
time. Not long compared with the passage of a millennium from start to finish.
And certainly not long compared with the 366 years of earnings Yahoo's
stock is currently discounting.
We hate to give the impression that it's only the Internet stocks that have gone
hog wild. High-techs generally have been asizzle. The Nasdaq 100, made up
of the 100 biggest caps on Nasdaq and, of course, heavily weighted with the
Microsofts, Intels etc., is up for the year by more than 60%. That's better than
triple the Dow's rise.
Still, there's no gainsaying that the Internet stocks have been positively
explosive. Amazon, for example, seems to trade solely in 30-point
increments. Amazon's market capitalization has swelled so awesomely that it's
bigger than the combined caps of Barnes & Noble and Borders, two much
larger companies with far greater assets and sales but with the distinct
disadvantage of earning money.
David Simon, of Digital Video Investments, whose designated turf
encompasses the Internet sector, is an informed and, at the moment, mostly
skeptical follower of the stocks, which he sees as on line for a correction of at
least 25% and counting.
Last week, as Bill Alpert notes in his tech column, Dave figured out the value
placed on Netscape's Netcenter (30% of the parent's most recent quarter's
revenues and all of the profits) when AOL acquired Netscape. Netcenter was
valued, he reckons, at a price/sales ratio of nine. By that real-world measure,
he observes, Excite is overvalued by 90%, Lycos by 200% and good old
Yahoo by 100%.
Which is why Internet stocks don't live in the real world.
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