Glenn:
I don't think that we should ever be Poyannish, but, in case this article hasn't been posted here, it merely reiterates what bears have been saying for months: anyone who tries to argue that amzn is a long term hold based on fundamentals is either
1. a shill who works at TMF (less respect for a group of people, I don't think I could have).
2. a day trader trying to lure in dupes.
3. someone who really has no idea how to do FA.
read on dear friends, read on
from the Economist (front cover -- header oped and main article)
Why Internet shares will fall
The Internet-
share bubble
The Internet
Search archive
“THE electric light is very probably a great invention, and . . . let us take it for granted
that its future development will be vast. But this, unhappily, cannot be urged as a reason
why the pioneer companies should be prosperous.” Time and technology have moved
on since 1882, when these words appeared in The Economist (as recently spotted by
the Wall Street Journal, assiduously reading our back copies). But the same sentiments
apply to today's great invention, the Internet. Because it is a potent and entirely new
medium, the net will change the way the world works and plays. Even so, today's
pioneering Internet companies are unlikely ever to earn the vast profits needed to justify
their current share prices. Indeed, future historians may well add Internet shares to a
long list of industrial assets—including biotechnology firms in the 1990s, radio
companies in the 1920s, electric-light companies and railways in the 19th century—that have come
spectacularly crashing to earth.
This newspaper has long argued that shares in general are overvalued, especially in America. And, because
American consumers have used their new-found paper wealth to justify spending more and saving less, the
economy looks vulnerable to a collapse in share prices. But the inflation of Internet shares is, in many respects,
quite different. Whereas investors on Wall Street are merely exuberant, the casino capitalists who spend seven
or eight hours a day at their PCs trading Internet shares appear to be stark, staring mad.
Most of those who have watched enviously from the sidelines sense that gravity will assert itself sooner or later.
Many of the online gamblers who have earned a fortune in paper profits betting their savings on shares in
Yahoo!, Amazon and the rest will never get their money out. For the very features that have led to a
near-vertical climb of Internet share prices also favour its precipitous collapse.
Most Internet companies go public by selling only a handful of shares: only 34% of Amazon's equity is publicly
traded, and a mere 9% of that of eBay, an online auctioneer. The few available shares are greedily snapped up
by a cyber-army of online “day traders” via electronic brokerages, such as E*Trade. Amazon's entire float
changes hands twice a week. Hedge funds that sold what they thought were already overvalued shares they did
not actually own have scrambled to buy back as prices rose. Just as tulips only became truly manic when
ordinary people started trading bulbs in Dutch taverns, so the trebling of Internet values since September has
been accompanied by a surge of trading among people unskilled in the art of valuation and unburnt by past
losses.
All this is likely to reverse with brutal rapidity. A thin market exaggerates falls as well as rises. The new online
brokerages may not be able to handle large volumes. Suddenly, hedge funds will start selling. As losses mount,
and buyers disappear, inexperienced investors could well panic.
Nobody can predict the extent of the fall. Even the experts do not know how to value Internet shares. Bill
Sharpe, for example, who won the Nobel prize in economics for work on pricing financial assets, is enough of
an Internet believer to have founded an online financial-advice company. Even he admits that “we are all pretty
much flying blind.”
The problem is not merely that few Internet companies actually make a profit (though this makes traditional
measures of value somewhat redundant). Although few now doubt that electronic commerce has a thrilling
future, reasonable people differ over what, and how profitable, that future will be. Some venture capitalists and
executives reckon that the biggest profits will be earned by companies that establish a strong brand by virtue of
being first in a market. They believe the coming collapse will affect only second-and third-tier firms.
Even this may be optimistic. In the end, valuation comes down to one simple fact. To justify today's share
prices, Internet companies will have to enjoy unprecedented growth in sales and margins. It would take
average annual profits of over $1 billion to make sense of Amazon's current $20 billion-odd market value. Yet
Amazon's total sales in 1998 were only $600m. The sales of many of today's Internet stars will never soar that
high. If anything, the Internet will give consumers more power and make it hard even for firms with a large
market share to raise their margins for long (see article) .
And after the fall?
Much will depend on whether the bigger stockmarket bubble bursts too. If it does, concerns about Internet
shares will be lost amid worries about the world economy as a whole. If Internet share-values topple in
isolation, however, the effects might actually be salutary.
Venture capitalists in Silicon Valley have more money than they know what to do with. Even after an Internet
crash, there would be enough wealth to back good ideas. Because current valuations have inflated what
Internet entrepreneurs think they and their ideas are worth, it would become cheaper for venture capitalists to
invest in them. The temptation today is to sell up and move on without having taken the trouble to build a real
business. Lower share prices would force entrepreneurs to lower their expectations and restore sanity to the
net's job market, in which people spend much of their day looking for employers offering juicier share options.
Investment in Internet businesses would suffer only if venture capitalists lost faith in electronic commerce
itself—as opposed to particular firms or the judgment of online traders.
The prospect of an Internet share-bust holds a warning for other investors. Today's appetite for equities rests
on an erroneous belief that they are a one-way bet: that, in the long run, they always pay higher returns than
other assets. Disappointing profits are dismissed with a wave of the hand and the promise of a better
tomorrow. When Wall Street crashes it is unlikely to fall so far or so spectacularly as will Internet shares. All
the same, when Internet shares plunge, the screams should strike fear into investors everywhere.
economist.com |
