To Thread:
Here's an analysis on DBCC from Briefing.com. I'm long DBCC and think it will go higher. But, just like MALL, it will probably start to tank a couple of days before the IPO of the subsidiary (on Friday).
Updated 11-Jan-99
Irrational: The DBCC Story
Whenever we at Briefing.com attempt to caution that the recent stock market rally might not be
justified and might in fact be a bubble, we inevitably receive a flurry of messages suggesting that
we just don't get it. Many have argued that we are in a brave, new world for stocks, one in
which old valuation measures no longer apply.
Different Outlook, Same Rules
To an extent, we agree. The technology revolution generally and the Internet revolution
specifically have changed some of the rules. A prolonged period of strong growth and low
inflation appears likely, even if we will not see both every year. Higher P/E ratios thus seem like
a rational shift. But there are limits. One rule of valuation still applies -- the value of a company
equals the discounted present value of future cash flow. And this rule is increasingly being
tossed aside in favor of the bubble rule.
The bubble rule of investing is that any stock purchase is rational so long as someone else will
purchase the stock from me at a higher price. In this world, there is no valuation measure. If
you make money following such an investment strategy -- great! That's what it's all about. But
we would warn those who hold substantial equity positions that such trends in investing are
ominous.
The DBCC/MKTW Play
We will make our point with a brief case study -- the DBCC/MKTW phenomenon.
Marketwatch.com is a joint venture between Data Broadcast (DBCC) and CBS (CBS).
Marketwatch.com is expected to go public this Thursday under the ticker MKTW.
Our story begins on October 13, when Marketwatch filed to go public. At the time, DBCC
had been trading at $3 3/8, giving it a market cap of $113 mln. Since then, DBCC has soared
to $26 3/8, boosting its market cap to $886 mln. For those who closely followed this story,
there is no doubt that this huge run in DBCC's stock has been the result of the prospects for
the Marketwatch.com IPO.
The only other fundamental news since the Marketwatch.com filing was DBCC's Q1 earnings
report on November 16, which quite clearly had no positive news given that the stock price fell
from $6 7/16 to $6 following the release. And indeed, there was no good news -- a multi-year
slide in earnings and revenue continued. Earnings per share fell to just a penny from $0.05 in
the year-ago period, and revenues were down 2.8%. There has been no other significant news
from DBCC since the MKTW filing.
The MKTW Math
After the MKTW offering, DBCC will own 38% of the public company. Given that level of
ownership and the increase in DBCC's market cap that can be attributed to the MKTW
offering, it is not difficult to calculate just how much MKTW will have to be worth to justify the
DBCC valuation. The increase in DBCC's market cap since the October 13 filing was $773
mln.
With DBCC's 38% stake, Marketwatch.com would have to achieve a market cap of just over
$2 bln for the run-up in DBCC to have been rational. Since MKTW is in the same business as
Briefing.com, we would like nothing more than to see it win such a valuation, as it would imply
very good things for us. But alas, MKTW is worth nowhere near $2 bln.
It's No EBay
Its offering range is $10-12, which would accord it a valuation of $141 mln. It would have to
rally to $173 to justify DBCC's current valuation, and even that estimate is too conservative as
it does not take into account the tax consequences of DBCC selling its MKTW stake. Rallying
from an offering price of $12 to $173 might seem absurd, but of course recent IPOs such as
EBay and uBid have skewed the market's perspective. But MKTW is no EBay or uBid. For
those auction providers, the size of their market is only constrained by the amount of goods
and services that can be auctioned. That's not much of a limit.
For MKTW, the size of the market is limited indeed. Marketwatch.com hit an annualized
revenue run-rate of just over $7 mln, and its annualized run-rate on net income moved to a loss
of over $14 mln. The sequential growth rate in revenues slowed to 18.4% in Q3 from 29.2%
in Q2. Its in-law company, CBS Sportsline (SPLN) is the best comparison for MKTW, and
SPLN has a market cap of $534 mln with revenues that are over four times those of MKTW.
Using that comparison, a $141 mln valuation is about right, while a $2 bln valuation is a joke.
The Message
Of course, those playing DBCC over the past few months have been rewarded whether or not
the fundamentals justify the price move. As for those holding DBCC into the MKTW IPO, we
suspect that a rude awakening is fast approaching. Even a successful MKTW offering and a
doubling of the stock to $25 on the first day would only justify an $8 price for DBCC. But the
real message behind the DBCC story is that in many regards, the equity market rally is clearly a
speculative bubble. Not always and not everywhere -- but it is demonstrably the case that
much of the Internet frenzy is a bubble.
Before you write in and try to convince us that we don't understand the Internet, note that we
are believers in the Internet, so much so that we have all staked our livelihoods on a Net
business. We also see the Internet changing the business world by changing the way in which
goods and services are priced and distributed.
The problem is that investors have few pure Internet plays on which to place Internet bets. The
benefits of the Net will be huge, and they will accrue to pure Internet plays, to many
traditionally non-Internet companies, and to privately held companies. Unfortunately, all of the
investor money is pouring into the publicly traded pure plays; vastly overvaluing many of these
companies in the process.
Eye On The Fed
Our concern is that this bubble's days are numbered, and that when it pops, it will take the
overall market down with it, just as it supported the market on the way up. When that pop
occurs is very hard to guess, though it would seem likely prior to mid-year for one important
reason -- the Fed will eventually step into the deflate this bubble if it continues to expand. A
number of Fed officials have already been warning about stock market valuations, but thus far
we have not heard from Chairman Greenspan. He testifies before a House Committee on
January 20, and what is typically a bond market event might have equity market implications as
well on this occasion.
Though the Fed will say that it does not have a target for stock prices, policy makers do
recognize the dangerous consequences of a bubble for the real economy. The long fall of the
Nikkei from 38,916 on December 29, 1989 to today's 13,392 offers a recent lesson in just
how large a bubble can become and how severe its aftermath can be. (and trust us -- everyone
in Japan thought that the Nikkei was invincible and that the old rules no longer applied on
December 29, 1989)
The Fed is well aware of this lesson even if most US equity investors are not. Don't be
surprised if Greenspan offers us a history lesson soon, and if he threatens (explicitly or
implicitly) to raise rates if the stock market bubble continues to expand. |
