I think you raise some valid points regarding valuation as applied to CMGI. Your short timing is good, largely a result, I would suggest, of the current inflation-outlook/interest rate environment. However, much depends on one's investment time horizon. For those of us thinking long term, CMGI has tremendous upside potential. For your
consideration, I offer the following partial-post from early-May on the Motley Fool CMGI thread. It was written by IFindKarma. He has followed CMGI for quite a while, and despite the current pull back, profited handsomely as a result. (Pricing noted is pre-split)
I'd say with CMGi, forget about earnings. CMGi was, is, and will continue to be
priced based on its assets.
So what are CMGi's assets?
1. The companies CMGi owns.
2. The companies CMGi will own.
3. The management and marketing experience of CMGi.
4. The relationships CMGi enjoys with other companies.
Let's break these down, one by one. First, some assumptions. CMGi's president
David Andonian has said that CMGi only invests in businesses they believe will
eventually be billion dollar businesses. CMGi's CEO David Wetherell said that
CMGi received 1000 business plans in January, 1000 in February, and 1500 in
March, and their plans are to choose about 20 companies this year. Let's
assume also that every time a CMGi Venture Capital arm runs out of funds to
allocate, that a new fund emerges and raises 2-4 times the capital to allocate
than the previous fund. (This has been the trend for @Ventures I, II, III, and
IV.) Let's also assume that CMGI's CFO, Andrew Hajducky, will follow
through on his public comments that he will figure out a way to keep CMGi from
being regulated as a mutual fund.
All those assumptions are based on things I have read about the company. So
what are the values of CMGi's assets?
1. The companies CMGi owns. I'm assuming it's overly conservative to
assume that each of CMGI's companies will eventually be worth just $1 billion if
that's what they're shooting for. Critical Path, Lycos, and GeoCities are all worth
between $3 billion and $5 billion right now. If we total the value of CMGi's
biggest publicly held companies (LCOS GCTY CPTH OMKT HLYW and
soon SILK, plus a sale of CMG Direct to MSGI and a sale of TicketsLive
pending) we'll find the value to be around $3 billion, but of course that fluctuates
on a regular basis. (The reason the public holdings of those 7 companies are
worth $3 billion instead of $7 billion is that CMGi has been selling off LCOS
and GCTY since they went public to raise money to pay operating costs and to
fund future @Venture endeavors.)
Let's assume that on average each of the following companies are worth about
$1 billion to CMGi. Some will be worth more, and some will be worth less,
especially since CMGi doesn't own 100% of each of these companies. But for
every several-billion-dollar 100%-owned company (Adsmart, Engage, Planet
Direct, NaviSite, and ICAST, for example) there are several-billion-dollar
not-100%-owned companies (Raging Bull, Chemdex, or Visto, for example), so
let's assume each of these companies is worth on average $1 billion.
Here is the list of non-public CMGi companies:
1 - Activerse
2 - Adsmart
3 - Ancestry.com
4 - Asimba
5 - blaxxun
6 - CarParts.com
7 - Chemdex
8 - eCircles.com
9 - Engage
10 - Furniture.com
11 - HotLinks Network
12 - ICAST
13 - KOZ.com
14 - Magnitude Network
15 - Medical Village
16 - MotherNature.com
17 - NaviNet
18 - NaviSite
19 - NextMonet.com
20 - OneCore Financial Network
21 - ONElist
22 - Planet Direct
23 - Raging Bull
24 - SalesLink.com
25 - Softway Systems
26 - Speech Machines
27 - ThingWorld.com
28 - Universal Learning Technology
29 - Vicinity
30 - Virtual Ink
31 - Visto Corporation
32 - ZineZone
So let's review. I think each of these 32 companies will either go public or be
sold in 3-5 years. I think that the 3-5 year average value of each of these
companies is $1 billion. I think that the current public holdings are worth $3
billion, and will be worth $7 billion in 3-5 years.
So I think the total worth of the current companies CMGi owns wholly or
partially is $39 billion in 3-5 years.
2. The companies CMGi will own. I assume that CMGi will peruse at least
1000 business plans every month until the Internet reaches maturity. March's
CMGi review of 1500 business plans tells me that my assumption is
conservative. I will also assume that CMGi funds 1 or 2 out of every 1000
businesses they hear about.
This leads me to believe CMGi will fund 12-24 new businesses every year until
the Internet matures, and I assume that the Internet will not be "mature" for at
least 3-5 years but more probably 10-15 years.
So let's say on average CMGi will fund 18 businesses a year for the next 5
years. That's 90 new businesses. Not all of them will be worth $1 billion in 3-5
years because not all of them will be sold or taken public in 3-5 years. Let's
assume half of these 90 companies funded in the next 5 years will be taken
public in the next 3-5 years.
So I think the total worth of the current companies CMGi will fund in the next
5 years is worth $45 billion in 3-5 years. CMGi will be looking for bigger
opportunities now that they have more money and more reputation, and they're
not afraid to think big, so I think this assumption is conservative, too.
3. The management and marketing experience of CMGi. and 4. The
relationships CMGi enjoys with other companies. Admittedly, these are
difficult to put a value on, but they are the reason that CMGi has been
successful.
The management in CMG Corporate are extraordinary: Chairman/CEO David
Wetherell, CFO Andrew Hajducky, President David Andonian, President Bill
White, President Marcus Bicknell, President Hans Hawyrsz, Vice President
Donald Combs, and Vice President Susan Priestley. We often think that
Wetherell is this company, but he's not: he's got incredible people working for
him. Furthermore, the @Ventures general partners are incredibly talented, and
the Internet Group has years of experience in a medium which makes them
old-timers. And CMGi's relationships are a veritable who's who of the power
structure of technology and the Internet: Microsoft, Intel, Cisco, Sumitomo,
AOL, Amazon, Yahoo, Lycos.
How to put a price on this management and these relationships? Admittedly, this
is touchy-feely. I'm thinking that the market currently places the premium on
them at $5-8 billion, considering CMGi's current stock price and current
publicly-held assets. I also think that this experience and these relationships will
become increasingly valuable over the years -- let's say that their collective
experience and relationships are worth three times the premium in 3-5 years as
they are right now, because these are the kind of things that become more and
more valuable over time, and that will allow them to continue to pick and choose
the best emerging companies to fund in the future.
So I think the total worth of CMGi's management and relationships is $20 billion
in 3-5 years.
Let's add them up. Current companies ($39 billion) plus future companies ($45
billion) plus management and relationships ($20 billion), and I get that CMGi's
assets will be worth more than $100 billion in 3-5 years.
Which makes any price you pay right now cheap when you look back to 1999
when you're sitting in 2004.
So what do I think CMGi is worth right now? Public companies are worth $3
billion, and let's say management and relationships are worth $6 billion. The real
question is, how many of CMGi's companies are going public or getting sold in
the next year? They say 12, but as RightNow pointed out, they always say 12.
We know for sure that Silknet is going public next week, and we know that
Engage and NaviSite are currently in the process of filing, and that Adsmart
keeps pumping up its management and assets, which suggests that they're
thinking about filing too (especially given those wonderfully phat premiums being
assigned to Doubleclick). Now although Silknet is 24% owned, Engage,
NaviSite, and Adsmart are 100% owned. And I'm gonna break my previous
rule and say I know about each of these companies to say that they will each be
worth at least $2 billion coming out of the gate, meaning together they will be
worth $6.5 billion to CMGi. And then, let's give the rest of CMGi's private
companies a nominal worth of $100 million to discount future worth; 29 such
companies (32 minus Engage, NaviSite, and Adsmart) is worth $2.9 billion.
So what do I think CMGi is worth right now based solely on its assets? $3
billion + $6 billion + $6.5 billion + $2.9 billion = $18.6 billion. Divide that by the
46.68 million shares outstanding, and I'd say that I believe CMGi is currently
worth 398 dollars a share. Thus any price in the 200's seems cheap to me.
Note that if/when more information comes public, I need to revise my price
target. Which is why I don't often do analysis like this. It takes a long time, and
usually all it tells me is that the companies I like best -- the companies that have
traditionally done extraordinarily well -- are undervalued compared to what they
one day will be worth. I'll defer to Michael Dell's words from page 219 in
Direct from Dell:
A hypergrowth company's relative lack of a past -- of sacred strategies,
or long-established practices and procedures -- means that it will have a
better chance to improvise as it goes. Hypergrowth companies are
quintessential learn-by-doing organizations. Their survival depends on
swift adaptation. Because resources and people are stretched, they most
likely don't have excessive formal or overly structured systems in place.
The key is to have enough structure in place that growth is not out of
control -- but not so much that the structure impedes your ability to adapt
quickly.
In other words, I like to focus on the companies that have a history of managing
hypergrowth well. Check out CMGi, AOL, Dell, and EMC, and you will see
four companies that have managed hypergrowth for at least five years extremely
well. I bet on the companies that have proven they have what it takes to turn on
a dime, and then I don't have to worry about day-to-day or week-to-week or
even month-to-month price fluctations. I can feel comfortable going long and not
having to redo my analysis every time new information comes available. I
inherently trust these companies based on their experience and their assets.
I can't predict the future, and I don't know where
this stock price is definitely going in 3-5 years, but I have my best guess, and my
best guess keeps me long and strong in CMGI.
Best of luck.
KurtSS |
