From Briefing.com
Updated: 28-Jun-99
Is Internet Growth Slowing?
The price of any stock is always based upon two things:
Perceptions of future business prospects for the company
Demand for the stock, in relation to the available supply
The first can be measured, analyzed, and predicted. The second cannot.
Internet stocks have been the beneficiary of a strong rise in both factors, but particularly from the second factor. Most internet stocks have issued relatively small proportions of their outstanding stock as float, the stock available for trading. This low supply for a strong demand increases the price.
But the first perception, that the internet will be the greatest economic boom ever, is the most obvious factor pointed to by most analysts.
And because no one could accurately predict either the eventually size or "top" of the overall internet, factor one became irrelevant in judging internet stocks. Factor two has controlled the price of the biggest internet stocks throughout 1997 and 1998, their greatest years.
There is an Eventual Ceiling
But the internet can't grow forever. And if you accept this, it means that someday, usage of the internet will begin to flatten out, and grow at much smaller rates.
When that happens, and is measurable, much of the high valuations of internet stocks will be taken down.
The duty of management, to shareholders, at internet companies is to make sure that their revenues increase at a fast enough pace to keep the stock price rising, as the multiple the market gives them declines. That will be no easy task.
When Will Growth Flatten?
So when will the growth of the internet, overall, begin to flatten?
Frankly, at Briefing.com we don't really know, but neither does anyone else. However, it is time to begin thinking about it. Here are four recent events that brought us to this conclusion.
PC Usage and Internet Usage is not rising rapidly as PCs and the internet penetrate the rest of the population. A recent survey done by Arbitron New Media, as reported in the June 21 Wall Street Journal, showed that while 59% of all US homes now have PCs, the percentage of adults using the machines fell from 90% to 53%. The numbers are especially interesting because they exclude usage by children. This means that while the new PCs being purchased is going up, the new users aren't really using them for much. The study also showed that the new PC owners do sign up for internet services, bringing the total US internet population to 38% of the nation's population. But only 2/3 of those signed up for internet services actually use them regularly or had made an online purchase. This survey, the full results of which have still not yet been released, may indicate that the current incarnation of the internet is simply too hard to use to capture the rest of the mass market yet.
Charles Schwab average daily trades going down: On June 14, Schwab (SCH) reported a slowdown of (28%) in total overall daily trades in the month of May. This is in spite of a continued growth of accounts. While it means that more people are online, they are, as a group, doing less. This confirms the trend shown by the Arbitron survey.
Amazon.com (AMZN) refuses to release revenue on book sales alone. Amazon no longer reports revenue broken out by category. This deprives everyone of seeing the revenue curve of book sales by themselves. Could it be that book sales have flattened? If so, we'll never know, because it will be buried in overall revenues, which includes other product lines and acquisition revenue streams.
Cyberian Outpost (COOL) had a sequential revenue decline in the most recent quarter, as reported last week. In the early stages of a boom market, everyone is supposed to benefit. It isn't until the market begins to slow that companies lose absolute market share to others.
We don't think these four items are evidence that internet usage or ecommerce growth is declining. In fact, internet usage is most likely still growing, although any method used is hard to prove accurate.
But the rate of growth, which is hard to measure, is almost certainly going down. When was the last time you heard the phrase "internet usage is doubling every 100 days?" You probably haven't, because it probably isn't anymore. It just gets harder to double as anything gets bigger.
Before any great storm, there are always a couple of isolated raindrops that cause you to look up at the sky and wonder if it is going to rain. That's what these four events above are like.
What to Conclude?
The first conclusion, as an investor, should be a recognition that the demand factor in a stock price will quickly evaporate if a company suddenly gets tagged as a non-growth company. Cyberian Outpost may suffer this fate if it doesn't show sequential growth in its next quarter.
The second conclusion should be a recognition that there are really two internets: the text based internet, and the media based internet.
The text based internet is what you see today. The media based internet hasn't happened in a large scale yet. Everything we have stated about rate of growth on the internet applies to the text based internet. The growth of the media based internet may be as phenomenal as the text based internet growth was from 1995 through 1998.
But the text based internet may already be flattening.
So the second conclusion for investors is this: is your company stuck in the text based internet, or can it benefit from the media based internet? If it is stuck in the text based internet, the stock price valuation multiples will certainly suffer when opportunities for investment in the media based internet come along.
Briefing.com Summary
In summary, Briefing.com believes it is time to begin looking for slowdowns in the rate of growth of the overall text based internet. There isn't enough evidence to make solid conclusions yet, but there are enough "hints" that all internet investors need to start looking, and considering the possible impact on their particular stocks.
When it was impossible to predict the ultimate size of the internet, it was impossible to rationally value an internet stock based on business fundamentals. As soon as everyone believes the internet is nearing its ultimate maturity, valuations will shift to business prospects, represented by actual trends, not dreams. If that happened today, nearly every internet stock would tumble. The current multiples imply virtually unlimited growth. As soon as it looks like we are getting close to the internet's ultimate size, current revenue streams will be judged in a new light.
We aren't there yet, but we may be getting close. At the very least, we are feeling a few raindrops.
|
