A QUICK FUNDAMENTAL ANALYSIS ON BID.COM
Everyone says you can't evaluate internet stocks on the basis of fundamentals. I don't understand why people keep saying this and not only that, I strongly disagree . The only tough part is estimating the future revenue stream... which is particularly difficult given the explosive growth of internet related firms... but otherwise it works out just fine. The only trick is to discount the final result to account for the uncertainty behind the rapid growth projection. Here's my simple example using bid.com with a 10 year pro forma.
Assumptions:
1) North American business-2-consumer revenue will keep up with the industry, which Forrester research estimates at 100% for the next 5 years. Implicit in this is that bid.com experiences no growth as a result of increased market share, which I believe is very conservative.
2) I assume (to be conservative) that growth will gradually decline after the first 5 years by 10% a year.
3) Assume relatively constant GP at approx. 10% (vs. 7% Q4/98).
4) Discount projected earnings at 10%. This might be low from a historical perspective but not in a zero inflation world (ie. assume continued low inflation).
5) Assume that as traffic builds that bid.com can contra advertising space on the web site for presence elsewhere to a large extent (ie. Chapters web site, etc.). Cap marketing/admin at $40m in out years.
6) Ignore earnings stream past 10 years. It is significant but due to long time frame=increased uncertainty, discount 100%.
$mil Cdn. 99 00 01 02 03 04 05 06 07 08
N.A. B2C Rev 50 100 200 400 800 1600 3040 5470 9300 14880
% Growth 100 100 100 100 100 100 90 80 70 60
GP$ 5 10 20 40 80 160 304 547 930 1488
Mktg/Admin 12 13 15 18 22 30 40 40 40 40
Earnings (7) (3) 5 27 58 130 264 507 890 1448
The discounted value of this earnings stream is $29.00 Canadian for each outstanding share, but this only includes the current North American business to consumer business base.
If we assume that their business to business model will be 3 times as large an earnings, based on Forrester research, and that the European business will be roughly equivalent to the North American business once it is up and running, current valuation is approximately $145Cdn. (ie. what 1 share should be worth today if there was certainty of the assumptions associated with the projection).
Obviously, there are a whole range of revenue assumptions we could test and these what-if analysis can really help determine what a reasonable share price range might be even for an internet stock IMHO.
I find these fundamental exercises on internet stocks makes for an interesting exercise. If nothing else I think that it highlights that the current valuations for internet stocks are no necessarily ridiculous. Besides, if they were, this would be totally inconsistent with the assumption that our markets are efficient and investors are reasonable.
As an aside, once you do this exercise, it becomes evident that Pavan's analysis is based on a 5 year projection without taking the business to business model or european expansion into account. When you have an industry that grows exponentially, time frame obviously has a huge impact. I guess he also doesn't think bid.com is going to be successful with their B2B model or international strategy!! Peculiar!!! Maybe he only knows how to work with 5 columns and 10 lines of a spreadsheet at a time <g>!!!! |
