Here's the article from TSC.com
cool
Investors in Net stocks hunt endlessly, it seems, for valuation
metrics. Well, not all. Many undoubtedly subscribe to the theory
humorously espoused by Roger B. McNamee, the tech-stock
pundit who also does some investing on the side. Net stocks,
jokes McNamee, are cheap at 50, fairly valued at 150 and
inexpensive again at 200 because they're about to split
four-for-one.
One tech investor who's digging just a little deeper is Charles A.
Morris, who succeeded McNamee in 1991 as portfolio manager
of T. Rowe Price's Science & Technology Fund, now a
$5.8-billion heavyweight.
Morris, like every other big tech investor, plays the Net. But he
notes investors should try not to think about "Net" stocks.
Instead, "the Internet is spread out all over the place," says
Morris, correctly calling Amazon (AMZN:Nasdaq) a retailer,
Yahoo! (YHOO:Nasdaq) a media company and PSINet
(PSIX:Nasdaq) a telecommunications service provider.
The distinctions are important, because they lead to a
demystification of all things Internet. Morris, who goes by Chip,
then applies some math to his labeling game in an effort to get
a "practical P/E," or price-earnings ratio, for Net-oriented stocks.
Morris's metric takes a company's price-sales ratio and divides
that by its targeted net margin. The effect is to hone a simple
price-sales metric by awarding more value to potentially more
profitable companies, regardless of their revenues. The model,
says Morris, allows investors to compare high-flying Net stocks
not only to each other but also to leaders in the rest of the tech
sector and other industries.
Let's see how it works in practice, using back-of-the-envelope
calculations for Amazon to ease understanding.
With Amazon trading around 150 and, with 157 million shares
fully diluted, the stock currently is worth roughly 17 times
estimated 1999 revenues of $1.4 billion. Assuming net margins
over time of 6% -- a big assumption considering Amazon isn't
profitable -- the company would have a "practical P/E" of 283.
Assuming an average annual earnings growth rate of 60% for
Amazon, and assuming that -- as a leader -- it deserves a
multiple-to-earnings-growth rate of about 2.3 -- which is a level
common to other leading companies in and out of technology --
Morris figures Amazon is worth 138 times earnings, or about
half its current valuation.
"At some point in the not-so-distant future there has to be a
reconnect with economic value," says Morris, who adds that
he'd buy Amazon's shares for somewhat more than half their
level but not at the current price.
There are some caveats to keep in mind when considering
words of wisdom from a fund manager like Morris. First, T.
Rowe Price has so much money to manage that it typically
makes only very large investments. That means Morris won't
even consider stakes in small companies that don't have the
potential for big payouts. Second, smart guys like Morris have
been predicting "rationality" would hit Net stocks for as long as
the sector has existed. Remember late last year when the
former Internet analyst at Merrill Lynch, Jonathan Cohen,
guessed Amazon would fall to a split-adjusted 17 and the
current Merrill maven, Henry Blodget, guessed it would go to a
split-adjusted 133?
The difference could be that now investors are becoming less
and less willing to cut profitless Net wonders some slack.
Then again...
It's not exactly like death, but...
Watching offline companies ponder their fates in the Internet
age is a painful process. It's so painful that Bradford C. Koenig,
who honchos technology investment banking for Goldman
Sachs in Menlo Park, Calif. (and who wasn't personally involved
with Tuesday's Goldman-led IPO of TheStreet.com
(TSCM:Nasdaq)), likens the realization process to the
well-known stages of facing one's final fate.
Think of any big, slow company -- many are Koenig's clients,
grasping for a Net clue -- when reading his morbid but accurate
five stages of Net awareness with paraphrased commentary:
1. Ridicule: "What a lousy way to make money!"
2. Bemusement: "How interesting that everyone's paying so
much attention to such a small operation."
3. Recognition: "Wow, they're growing quickly."
4. Fear: "That 18-month-old company is taking share from us!"
5. Panic: "I'll be out of a job if I don't get a Net strategy soon."
"There's not a CEO in the country and probably the world who's
not completely focused on how the Internet will transform their
business," says Koenig, who asserts that only after "panic"
does a big company move on to the crucial Stage No. 6: Action.
Wishful thinking?
Alfred J. Castino, CFO of PeopleSoft (PSFT:Nasdaq), knows
about repricing stock options. The Pleasanton, Calif.-based
maker of software for big companies repriced its employees'
options on Dec. 14 at 22 after the company's stock plunged
from a high of 52 1/8 earlier in the year. That's why NationsBanc
Montgomery Securities analyst Robert Austrian invited Castino
to participate in a telephonic panel for clients about new
accounting standards that will make it more difficult for
companies to play the repricing game.
Castino took umbrage, however, at the suggestion that the new
standards -- still being pondered by the Financial Accounting
Standards Board -- will affect PeopleSoft. (Readers of fine print
might want to check out the FASB's draft proposal.)
"We certainly hope to never be in a situation where we have to
reprice again," said Castino.
Happy thoughts, to be sure. But PeopleSoft's shares kept falling
after the repricing, hitting a low of 11 1/2 three weeks ago and
closing Tuesday at 14 5/16.
Castino argued -- as do all senior executives at tech
companies in this pickle -- that the repricing is necessary to
retain employees. But the employees who exchanged
high-priced options for new ones also agreed to push out their
vesting period by six months and not to exercise any repriced
options for the same period.
The FASB wants to penalize companies that reprice by forcing
them to reduce earnings by the amount employees profit from
repriced options, a fair proposal. The companies themselves
will continue to whine that repricing is crucial in Silicon Valley
because employees otherwise will leave for greener pastures.
But if repricing is always the solution, one that's not available to
shareholders, doesn't that turn options into an entitlement
rather than an incentive? |
