Interesting interview with Adam Adamou from Taurus on MCF. I like it!
StockHouse.com News Maker Interview - Apr. 18, 1999
An Interview with Adam Adamou, Partner, Investment Banking Division of Taurus Capital, Taurus Capital Markets
• • •
Adam Adamou is among the most frequently quoted Canadian analysts, who follow Canadian Internet stocks. This past week, Mr. Adamou was featured in a report on Canadian Internet stocks, published by the online edition of Smart Money magazine, a Dow Jones publication. He has also been a long-time critic of Bid.Com [Toronto - BII]. Adamou names his favorite Canadian Internet stocks, his favorite U.S. stocks and discusses where the industry is heading.
StockHouse: What are your current thoughts on Bid.Com and Internet stocks in general?
Adam Adamou: If you've been following, what I've been saying about it (Bid.Com), I've been calling it a sell for longer than anybody. Unfortunately, it doesn't matter what I've been saying. The issue for Bid.Com is one of valuation metrics. At what point does the valuation of a company become so skewed as to cause you to question the metrics that you're using to value a particular stock? Now, I've got a lot of experience in valuations, and valuations of companies in general, going back ten years now. The existing models that we use to value companies work for Internet stocks. You just have to adjust the model slightly. Generally what we do is we look to explain the volatility. For example, any valuation you base it on some kind of a forecast of some future number, usually earnings. You apply some kind of a multiple, and then you discount it back to the present at some kind of a discount rate. So that's just a start. You've got (an) earnings estimate - doesn't matter if it's an Internet company. You still need an earnings estimate at some point. You need 3 things: discount rate, earnings estimate, multiple, and obviously some kind of a horizon. How long are you going to go forward? What you need to do - the existing model that somebody uses to value a company - is, you can't look at the existing growth rate for revenue. You've got to forecast into the future at a point where you believe the growth rate is going to be sustainable in nature. What's the constant sustainable growth rate once a company gets to where it's going to be. That's the number that you're looking for. And for the Internet stocks, that horizon is way out there. If you look at top-down forecasts of the Internet industry, estimates are for Internet stocks, the Internet business, to be something like $1.3 trillion in value. You give that a market cap of say 5 times revenues. Revenues are $1.3 trillion. Give that a value of 5, that gives you a market cap of $6.5 trillion ten years down the road. Well, the market cap of the entire industry right now is maybe $300 or $400 billion. No, let's say it's $500 billion. It's gonna go to $6.5 trillion. You're talking about growth of 13 times in 10 years. That's pretty strong growth. Clearly not everybody is going to be successful, but clearly there's a lot of growth, if you look at it that way. And clearly they're not all over-valued, if you believe in the growth of the industry. On an overall basis, no, I don't think Internet stocks are overvalued. I think there's still a lot of room to grow. What's the volatility in other words? How can you explain the volatility? Well, the volatility is very simple to explain. When you're forecasting 10 years in the future where the market's gonna be, it takes 10 years worth of compounding on your discount rate for you to get to the present value. Small little changes, things like changes in interest rates, things like changes in the forecast growth rate for the industry, changes in anticipation - any small little change has ten years of compounding to impact the present value. That creates huge fluctuations in the present value of these companies. That explains the volatility. They are normal stocks, and they do get valued by the same metrics that you use for anything else. We're just going out further. And, there's more uncertainty. Therefore, there's more volatility. The measure of the market going forward, top down. There's definitely room for growth. And it's probably very competitive with other industries out there - probably more growth than most of the other industries out there. So they should have higher value than that. The uncertainty then becomes which ones are going to be the winners, and which ones are going to be the losers. And what the market has been seeing is that, frankly, they don't know. You take a look at small startups ten years or 15 years ago, like Dell. Who would have thought that they would have been the #2 market cap hardware company in the world today, next to IBM? Probably nobody.
StockHouse: What about Dell?
Adamou: I think Dell is one of the best Internet companies out there that nobody treats as an Internet company. Look at Dell. They sell $14 million bucks a day on the Internet. If they were to spin out - here's a funny little sidebar. If Dell were to sell out their Internet division, it would probably end up being worth more than Dell. And then the Internet division could come back and buy Dell and get a higher market cap.
StockHouse: What do you think about James Dines issuing a sell on all online Internet auction stocks?
Adamou: I disagree. I don't think you can say that about any specific sector, per se. You've got to look at the companies in it. I think eBay's going to be a winner, long-term.
StockHouse: What is your long-term horizon on that forecast?
Adamou: Again, I'm looking 2 to 3 years, 5 years. Who's going to be the winner and who's going to be the loser? You want to day trade this stuff? There's no analyst that can talk about it that's going to be able to help. Because if we knew, we wouldn't be analyzing, we'd be rich. So, you're looking down the road. Is eBay going to be a winner? I think eBay's going to be a winner. I think they've got all of the elements to be a winner: Huge traffic on their web site, large number of registered users, good strong revenues, good profitability. The thing is, you can't just look at it and say what do they do now? You've got to look at it and say: Is eBay in a position to leverage off of that down the road? And I think the trend is going to be that the value of your business is just some fraction of the value of your overall company. Because there's a huge value to having that kind of traffic go to your web site. It's just like having a television show that's very popular. Getting all those people there is very valuable. I'm not just talking about advertising opportunities. I'm talking about spin-off businesses.
StockHouse: Are you talking about E-commerce opportunities?
Adamou: Whatever - moving off into other areas. All you have to do if you're eBay is just sit back and think of creative, different kinds of businesses you can run and maybe nobody's thought about. You've got a captive audience to do it with. When you hit the kind of critical mass and mind share that eBay has, I think it's difficult to say that all auction companies don't make any sense. Because of any of the auction companies, if the auction business didn't work, they would be in the best position to move into something else. If you look at Amazon.com, as an example, they started off with books. Now, they're moving off to everything else. I think that's a great strategy as well.
StockHouse: Do you believe Amazon.com is a good one for the long term?
Adamou: I think Amazon.com is a good one for the long term. I think eBay's a good one for the long term.
StockHouse: What about Bid.Com and the "hysteria" over the NASDAQ listing?
Adamou: I don't know. Bid.com, by any valuation metric you choose to use, is very expensive. I won't say that the company is not going to ever be successful. What I'm saying is you compare it to eBay, you compare it to Amazon, you compare it to nearly any other company you want to think about, and it's expensive. Now it's got 50 million shares outstanding, more than 50. It's got a $30 dollar stock price Canadian - which gives it a $1.5-billion (US) market cap and quarter to quarter growth of 1.5 percent. They have 330,000 monthly visitors to their site. eBay has about 1.5 million. eBay and Amazon are just way, way up there. If you want to look at value on a per-visitor - I mean they (Bid.Com) get more value for their visitors than almost anybody else. Why is that? I can't answer that.
I think Dell is one of the best Internet companies out there that nobody treats as an Internet company. If Dell were to sell out their Internet division, it would probably end up being worth more than Dell. And then the Internet division could come back and buy Dell and get a higher market cap.
StockHouse: Unless Bid.Com gets more value?
Adamou: Yeah. Well, it's got a billion dollars and 350,000 thousand visitors a month, has a higher growth market, ten times the revenue, growing faster on a quarterly basis. eBay is growing much faster on a quarterly basis. It's got nearly 2 ½ times the growth margin. You tell me. I don't know. I can't answer that. I would be a little cautious.
StockHouse: Of course you would be cautious. Anyone who has been burned as badly as that.
Adamou: I don't think it's (Bid.Com) trading on its fundamentals, It's hard for me to tell you.
StockHouse: Is some stock promotion outfit behind the share price rise?
Adamou: They do have an involvement with a quasi-IR group that doesn't get paid (paid in shares), but the volume that's going into the trading… Here is where I think Bid.Com has a chance to prove itself: I strongly believe that a stock price increase in an Internet stock creates it's own value. In other words, the value of the company actually goes up because the value of the stock goes up. They're two separate things. I mean forget about the stock. I'm talking about the company. It's a better company because the stock price goes up. It gets you exposure, brings traffic to your site, you go out and buy stuff. I think Bid.Com should go out and buy stuff. I think what they can do and what they should do is go on an aggressive acquisition campaign - use their shares to the largest extent possible as currency to buy other companies. Build the business that way. Because with the valuation that the company has now, I think it is much less expensive for the company to buy the business that it needs rather than to try and grow it. With the stated targets that the company has of $35 million (US) for 1999, it has to be about 4 times larger than that. I would immediately go out and start an acquisition program..
StockHouse: What is your opinion of the various gold mining companies following the lead of the Australian miners and trading in their dynamite and trenches for the Internet?
Adamou: Well, I think they're smart. They're not going to go anywhere with resource prices being where they are. Their stocks are pretty well at all-time lows. Most of them are shell companies, anyway, with limited operations.
StockHouse: How about American Gem [Toronto - GEM]?
Adamou: I've been reading about them. I know the guys that run them, but I haven't called them up lately. What can I tell you? The market has given these guys some value. American Gem had 48 million shares traded in one day. They traded more stock on one day than any other stock that's being traded here (Toronto). That's the record - 48 million shares.
StockHouse: Are they going to make this work?
Adamou: I think the stock is expensive but I wouldn't…
StockHouse: What about Dejour [Toronto - DEJ] mines?
Adamou: I've talked to them once. They (Dejour) have an option to buy 50% (of InstantDocuments.com). To be perfectly honest, Dejour Mines - we don't trade much of it. I'm never going to do any work for them.
StockHouse: What are your thoughts on Microforum [Toronto - MCF]? Does that one look good is it a bomb?
Adamou: In my opinion MCF has good marketing growth, diversified business. MCF is, I think, what Amazon should have been. Amazon went out and started selling books. What they did in order to sell their books, they needed to put together the marketing arrangements, call centers, distribution, shipping, warehousing, and all of that stuff. What they did was create a huge, beautifully efficient organization to push products over the Internet. Then what they're doing is, they're using this very efficient organization to squeeze and stuff pinholes out of the Internet. That's leverage off the organizational contacts that they put together and increase the size of the pinhole on the Internet to get more products through it. What MCF is doing is something similar. They've built the vast infrastructure that Amazon has. Why should they go out and try and put their name on stuff and try to get people to come to their pinholes? They go out to guys like Sony., the National Bank, Ford - the big organizations that are looking at the Internet and saying, "Boy, this is really good. We got to get on there but I can't justify it to my shareholders and all kinds of money, because they're going to nail me on my value in the market in the meantime." What they're (Microforum) doing is, they have got everything that Amazon has in place, but they put other people and names in on top of it. So, you know Sony might be one, Ford might be another. What they're doing is saying, "You guys drop your name on top of ours. We'll do the e-commerce stuff. We'll do the fulfillment, shipping, the marketing, call centers and we'll make it look like it's you, ok? But you pay us to do it, and then you give us a royalty." So what they do is leverage one infrastructure with possibly 5 of other organizations out there. From the organizational perspective, they get in cheap. They get the right to buy stock at a future date. They don't have to worry about being all - they're not geared to do it anyway. And they can do what they do, which is manage the product. So as a concept, it's probably one of the most compelling ideas I have heard in a very long time. It's starting to happen. They've got a lot of different things on the go. They're making the right decisions. They're slowly, methodically building a real business in terms of Canadian Internet companies. That (Microforum) is my favorite right now.
StockHouse: In terms of valuation, when Microforum going to kick off and start imitating the rest of the Internet?
Adamou: It certainly looks less expensive than most of the competitors out there
StockHouse: If Microforum is your favorite, who is Number Two?
Adamou: That's tough. I like Microforum because they already have stuff moving forward. I do like a Canadian company that became a US company: Rowecom Inc., ROWE on NASDAQ. It actually started off in London, Ontario. And the moved it's head office down to Massachusetts, then did an IPO on NASDAQ a few months ago. Rowecom is one of the leading e-commerce firms in the publishing industry. Any kind of information, subscriptions for their magazines over the Internet? They get a cut for every single transaction over their website. They're getting into Europe already big in North America and Canada
StockHouse: What do you think of the Net.B@nk [NASDAQ - NTBK] phenomenon? Their stock moved took off to almost $250/share.
Adamou: The Net banking phenomenon is a great one
StockHouse: Will be someone like that in Canada?
Adamou: I'm delighted the Canadian banks do Internet banking. TD - there is an Internet stock in my mind. I think it's a good stock to own right now. It's a good stock to own pre-Waterhouse IPO. I think the banking component of TD is undervalued. If you take a look at TD on the NYSE, I think their stock value is something like $17 billion US.
StockHouse: What about the convergence industry and how that's going to effect the Internet and computing?
Adamou: I know Research in Motion [Toronto - RIM; NASDAQ - RIMM] quite well. I was involved with them in a venture capital fund. I would never sell them short because they're some of the smartest guys I know. It's a great product. However, there were a couple of things that concerned me about it - that would be the overall convergence that you are talking about. My feeling is that at the end of the year you're going to have one tool. It's not going to be a pager. I really believe that in 3-5 years time, the point of access to the Internet will be wireless. There is research being done and technology being developed right now - some of which are available coming soon that get you 30MB wireless. You're getting into cable-modem speed. There is a company in Canada called Wi Lan, Inc. that trades in Alberta [Alberta - WIN]. They are talking to a number of partners for commercialization right now. I think you're going to get huge increases in bandwidth, wireless bandwidth in particular. It's going to be far more convenient to take the Internet with you than have it on your desk. Once you can take the Internet with you, it's hard to see where the pager comes in.
Today's
News Maker
interview
sponsored by
StockHouse: Have you been following Nokia?
Adamou: Yes, I'm very familiar with what they are doing - a very innovative company. I've been getting a lot of feedback that they're going to be a player. Look at what's happening in wireless technology to carry that stuff wherever you want. They are positioning themselves to move into that quickly.
StockHouse: Thank you very much, Mr. Adamou.
|
