Gamblers had better monitor these companies for the slightest sign of
bad news.
As Net stocks soar, keep your parachute
BY ADAM LASHINSKY
Mercury News Staff Writer
WATCH for cracks.
Greater fools repeatedly have bet against Internet stocks and lost
over the last 12 months on the assumption that companies like
Amazon.com Inc. (Nasdaq, AMZN), eBay Inc. (Nasdaq, EBAY)
and Yahoo Inc. (Nasdaq, YHOO) don't deserve valuations in the
billions of dollars.
There is absolutely no sign the dam is about to break. But the
gamblers who are staking fresh money on risky wagers had better
monitor these companies for the slightest sign of bad news.
Unprofitable -- or barely profitable -- companies with valuations
many times that of decades-old institutions will be afforded no slack
when the first sign of trouble appears.
Consider last week's flap over Amazon, the online retailer of books,
music and whatever else is likely to strike its fancy in coming months.
Its stock traded up about $50 (to just below $300) in one day last
week when analyst Henry M. Blodget of CIBC Oppenheimer Corp.
told clients he thinks the stock will be worth $400 in the next 12
months. Jonathan Cohen, Blodget's competitor at Merrill Lynch &
Co. (a far more influential firm both with retail investors and
investment-banking clients) countered that Amazon is ''structurally
disadvantaged'' against existing retailers and will be plagued for the
foreseeable future by ''painfully thin operating margins.'' Cohen
thinks Amazon's stock is worth more like $50.
This must be the first time in the history of Wall Street that analysts
for established brokerages are $350 apart on their price targets for a
stock.
Drilling down into what both analysts are saying, however, should
yield reasons for worry for investors in all kinds of Internet
companies.
Blodget, a serious guy who's well-respected by institutions craving
information on the Internet industry, quickly followed up his initial
note to clients with another, more cautious, missive clarifying that he
doesn't see $400 as a near-term price target (Amazon's stock
closed Friday at $286.69, up 29 percent for the week).
He also points out what will be a large, potentially negative event
early next year: the possibility that the first quarter won't come close
to matching the fourth quarter's holidays-induced performance.
''Because Amazon.com is a retailer, we consider it very likely that
its business model will ultimately resemble that of other retailers in
terms of quarterly revenue distribution,'' writes Blodget. ''This means
it is likely that Amazon.com could post (first-quarter) revenue that is
sequentially down from (the fourth quarter). Because this would be
the first time in history that this happened, we believe the market
could well perceive it as a negative, causing a significant near-term
pullback.''
Cohen, for his part, calls Amazon's 1999 projected sales and
marketing expenses of $210 million on sales of about $1 billion
''hideous'' and suggests the company may never win the type of
operating margins America Online Inc. (NYSE, AOL) gets.
Consider another strange Net occurrence last week. eBay, saying
it's concerned that competitors are monitoring the data it posts to its
site on the number of ongoing auctions, removed the aggregate
numbers Thursday from its home page.
There's another possible explanation for the removal, however.
eBay's ongoing auctions reached a peak of 1.2 million earlier in the
month but by late last week had declined to less than 900,000.
''Our numbers always slow down the week before Christmas
because our site is people trading with other people,'' says Steve
Westly, eBay's vice president for marketing and business
development. ''People are spending more time with their friends and
family.''
That ''always,'' of course, is based on three whole years of
experience. If eBay's auctions don't bounce back in January,
investors could panic.
And for what it's worth, eBay decided a day later to restore the data
because ''our core value is to be an open, honest site,'' says Westly.
Ten years from now we probably won't be talking about ''Internet''
companies. We'll be talking about retailers, media outlets, banks and
so on that use the Internet as a normal way of doing business.
Normal businesses have seasonal fluctuations in their revenues and
earnings. And their stock prices periodically move up and down.
Normal companies get normal valuations, however. If the dam
breaks on Internet-stock valuations, an umbrella won't be good
enough.
RE-HASHING REPRICING: You know you've struck a chord
when a column provokes simultaneous rebukes from opposite sides
of the fence.
''I am surprised that you could consider your latest rant on repricing
options complete without at least exploring the possibility of a
positive cause and effect,'' writes Neil R. Henry, a veteran of past
Silicon Valley repricings, regarding last week's column suggesting
that employee stock-option repricings can be a buying opportunity
for investors. ''Isn't it just possible that repricing the options
eliminates many distractions and re-instills the sense of urgency into
day-to-day business?''
The cause-and-effect argument is compelling, and Henry argues
forcefully that if employees aren't answering headhunter's calls
they're better able to focus on important tasks, which leads to
increased profitability and stock prices.
One problem: What were those same employees -- and their
managers -- doing while the stock was on its way down?
Stock-option repricings undoubtedly prevent employees from
jumping ship and may signal that a stock has fallen so low that the
Wall Street sheep are baa-ing too loudly. But to suggest that it
causes stocks to rise is a bit of a stretch.
Another reader, a good friend and extremely wise business journalist
who will remain anonymous, chastised me for giving up the fight on
behalf of the little guy and for buying into the Silicon Valley
establishment's self-serving view on this issue.
Not so! Repricing is unfair to existing shareholders and a largely
Silicon Valley perversion of incentive compensation theory. It sends
the message to employees that they'll get their ''extra'' pay whether
or not the company's stock performs well. (Translation: ''Stock
does well, your options are valuable; stock doesn't do well, we'll
reprice your options so they're valuable again.'')
But making money on the stock market isn't necessarily about what
philosophically is right and wrong. When a good company hands out
goodies after its stock has plummeted and succeeds in keeping the
rats from abandoning ship, investors may be able to seize the day.
Incidentally, several readers have asked if there's a place to research
corporate repricings as a way of picking stocks that will benefit.
Companies typically disclose repricings either in press releases or in
quarterly filings with the Securities and Exchange Commission. But I
don't know of a free, comprehensive resource on which companies
have repriced. Send in suggestions and I'll pass them along.
Contact Adam Lashinsky at the San Jose Mercury News, 750
Ridder Park Drive, San Jose, Calif. 95190, or
siliconstreet@sjmercury.com or 408-271-3782. |
