From Briefing.com: ONSL's performance outstanding
This report found on SI's COOL message board. Look at ONSL's metrics as documented by Montgomery Securities and reported by Briefing.com.
BAM
***
Updated 17-Feb-99
Institutional Valuation Metrics For Internet Stocks
One of the interesting historical aspects of the Internet revolution will be that the tremendous rise of Internet stocks from 1997 through 1998 was due almost entirely to individual investors.
Although investment bankers brought internet companies public primarily through institutional investors, but most of those institutions sold the shares quickly. Institutional investment in many of the best known and most important internet companies was minimal throughout most of 1997 and 1998. Amazon.com (AMZN), for example, had only 17 mutual funds invested in it in Q1 of 1998 with a total combined investment of 768,600 shares, not even 1% of the float. This means institutions, by and large, missed out on the fantastic returns in internet stocks from mid-1997 to the end of 1998.
But, as Briefing.com has noticed time and again at conferences for institutional investors, the institutional investors will eventually be major buyers. Why? Because some of the internet stocks will eventually become major blue chip companies. America Online (AOL) has already achieved this status. But what stocks, of the hundreds to choose from, will institutions eventually settle on? And what parameters will institutional investors use to make their choices? Certainly traditional valuation metrics such as Price/Earnings ratios are not appropriate for the relatively immature internet economy.
New Metrics For Internet Stocks
The first glimpses of the answer to this question came recently at the NationsBanc Montgomery Securities Technology Week Conference, held in the first week of February, in San Francisco.
Principal Analyst Steve Horen made a presentation listing new measurement parameters for internet stocks. The parameters, while actually rather straightforward calculations, give clues as to what will be important to institutions as the internet economy matures.
Mr. Horen presented four parameters by which an internet business model should be judged. These were the following:
MetricPurposeRevenue/ReachHow an audience is monetizedGross Profit/ReachQuality of revenueRevenue/EmployeeRough estimate of leverageGross Profit/EmployeeMore precise estimate of leverage
These are all relatively straightforward calculations. The numbers used are readily available to individuals and institutions alike, with the exception of "reach." Reach is a standard metric in the advertising industry and indicates how many potential "viewers" a channel is able to "reach." It is generally presented as a percentage of the total possible audience. In Internet terms, "reach" is roughly equivalent to traffic, as measured by unique users. The most common provider of reach data is Media Metrix, Inc.
The revenue/reach statistic indicates how a company is able to make money from its audience. In other words, so what if you have a lot of traffic, if you can't get a buck from anyone?
This seemingly basic concept has been largely ignored by many investors in Internet stocks over the past year. High traffic numbers were used by many as an important statistic for determining an Internet sites overall business future. But that era appears to be ending.
However, the ability to generate revenue is not a single criteria. Gross Profit/Reach measures the "quality" of the revenue generated. Gross profit is the difference between the price charged for an item, and what the item costs the merchant. It is different than net profit, which would include all marketing and sales, administration, and capital costs. .
The crucial element to recognize here is that profit matters. Although apparently willing to ignore marketing costs, for the time being, institutions will want to see profits. For now, gross profit is enough. The assumption is that if gross profit is high enough, eventually the internet business will become efficient enough to actually show net profits.
Clearly, higher is better for both of these metrics. If you can get more dollars from more people, that's good.
The next two metrics, revenue/employee and gross profit/employee are measures of leverage. Leverage is the relationship between fixed costs and variable costs. The lower the variable costs of providing additional revenue, the greater the leverage.
Leverage is one of the great features of the internet. When people talk about the internet not having "brick-and-mortar" costs, they are focusing on the leverage. Incremental sales on the internet do not require additional time by an employee. Territorial expansion does not require building another building. Achieving growth, without incurring additional costs of the growth, is a key element of internet business models.
Institutional investors have always loved to see companies that are able to increase their gross, and net, margins as they grow their revenues. The internet, practically by definition, will provide many companies that are able to do this.
Although there are far more fixed costs than salaries, using the number of employees in a company as the measure of fixed costs is probably appropriate. Certainly it is an easy calculation. Other fixed costs, such as the capital costs to set up the internet site, do not represent the ongoing fixed costs of business, as the capital costs are depreciated over time.
The two leverage metrics also are better if they are higher. The ideal company has few employees, but high revenues and profits. The closer the ecommerce company comes to a vending machine, the better.
How Internet Companies Measure Up
How do internet companies measure up using these metrics? Here are some tables analyzing some of the well-known internet companies, as calculated by NationsBanc Montgomery Securities. (Not all internet companies were measured by Mr. Horen; his universe was limited to those covered by NationsBanc Montgomery Securities.) All of the numerical calculations listed below were determined by Briefing.com, by approximation from a bar chart. The actual data was not released at Mr. Horen's presentation. However, for comparative purposes, the numerical approximations are useful.
Revenue/Reach Measurements
Revenue/reach is measured in millions of dollars divided by millions of users. Note that the reach number is not the actual number of customers, it represents unique users who visited the site. Reach is determined by survey, done by Media Metrix.
TOP FIVEREV/REACHBOTTOM FIVEREV/REACHONSALE (ONSL) $108Yahoo (YHOO)$5America Online (AOL)$95Lycos (LCOS)$5Amazon.com (AMZN)$65theglobe.com (TGLO)$2Cyberian Outpost (COOL)$48Xoom.com (XMCM)< $1Intuit (INTU)$33Geocities (GCTY)< $1
Source: NationsBanc Montgomery Securities
It should be noted, however, that the above measurements were made before ONSALE made its business model transition to a "fee-per-transaction" where items are sold at cost, plus a small fee. This change would likely alter Onsale's prominent position on the chart.
Gross Profit/Reach Measurements
Gross profit measures only the difference between revenue and the cost of goods sold. It does not include sales and marketing, administrative, capital investments, etc. Again the numbers are best used for comparative purposes.
TOP FIVE GP/REACHBOTTOM FIVEGP/REACHAmerica Online (AOL)$34C/Net (CNET)$2Amazon.com (AMZN)$14Lycos (LCOS)$2ONSALE (ONSL)$11theglobe.com (TGLO)$1Cyberian Outpost (COOL)$7Xoom.com (XMCM)< $1TicketMaster (TMCS)$5GeoCities (GCTY)< $1
Source: NationsBanc Montgomery Securities
Revenue/Employee Measurements
Revenue/employee numbers are easily calculated. In judging the leverage capabilities of an internet company, however, Briefing.com believes you should make an adjustment or "fudge" factor for the maturity of a business model. If the company's model is highly leveraged, but the potential of that model has yet to be reached, the revenue/employee will be lower than that of a more mature company. Leverage implies that revenues can rise without adding additional employees. Numbers shown are approximations and listed in thousands.
TOP FIVE REV/EMPBOTTOM FIVEREV/EMPOnsale (ONSL) $980C/Net (CNET)$90TMP (TMPW)$370TicketMaster (TMCS)$60Cyberian Outpost (COOL)$300EarthWeb (EWBX)$30Amazon.com (AMZN)$275theglobe.com (TGLO)$30CDNow (CDNW)$240Intuit (INTU)< $10
Source: NationsBanc Montgomery Securities
Gross Profit/Employee Measurements
Gross profit/employee numbers are also easily calculated. Again, Briefing.com believes that a consideration should be made for the maturity of the company's business.
TOP FIVE PROFIT/EMPBOTTOM FIVEPROFIT/EMPIntuit (INTU)$145Computer Literacy (CMPL)$35ONSALE (ONSL)$96C/Net (CNET)$25TMP (TMPW)$92theglobe.com (TGLO)$22Amazon.com (AMZN)$58TicketMaster (TMCS)$15Xoom.com (XMCM)$50EarthWeb (EWBX)$1
Source: NationsBanc Montgomery Securities
Briefing.com Analysis
Institutional investors widely believe that 80% of all internet stocks will eventually be worthless. But the remaining 20% will likely be worth much more than they are today. As the internet promise begins to be fulfilled over the coming years, institutional money will have to find internet stocks to buy.
Figuring out how institutions will invest long term in internet stocks will be just as important as figuring out which business models will eventually succeed. While Briefing.com believes that all internet companies will eventually be judged by the more traditional valuation measurements such as price/earnings and PE/growth ratios, that won't happen until the industry starts to show signs of maturation.
Until then, creative measurement techniques such as Mr. Horen's metrics will help investors judge which internet companies will be the long term survivors. Briefing.com doesn't expect these metrics to become the only criteria; in fact, it is likely that other analysts will begin developing additional metrics. But the very fact that institutional investors are beginning to find ways to value internet stocks is itself encouraging.
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