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Technology Stocks : Internet Guru Discussion -- Ignore unavailable to you. Want to Upgrade?

To: steve harmon - analyst who wrote (2403)	8/11/1999 6:17:00 AM
From: stockman_scott	Read Replies (1) \| Respond to of 4337

Steve: Any comments on this study on Internet Valuation Methods? <<Stanford study says Internet companies hard to value Reuters PALO ALTO, Calif. (8/11/99) -- A Stanford University professor studying the ways financial analysts rate Internet stocks has concluded the process is highly subjective, involving untested financial models and even some spin. The ''buy,'' ''sell'' or ''hold'' ratings that Wall Street analysts place on stocks can influence investors, especially some of the less sophisticated investors who have been drawn into market seeking fast returns on Internet stocks. But Professor Ezra Zuckerman and four of his students in the Stanford Graduate School of Business interviewed several analysts who follow the Internet industry as well as Internet c Stanford Graduate School of Business interviewed several analysts who follow the Internet industry as well as Internet c ompany officials, and found that the process of ''rating'' these companies is particularly arbitrary, often regarded as more of an art than a science. ''My opinion is (that this is) very much an art. Not a science at all,'' said one Internet company official quoted in the study. Analysts issue earnings estimates and ratings to help guide investors. But because these analysts work for investment firms that want to sell stock, seasoned investors know to be wary of excessively bullish recommendations. In defense of analysts, the study points out that the investment banks they work for would not be backing an Internet company in the first place unless it believed in its promise. The Internet phenomenon, however, may be making the balance between serving the company, the investment bank and the investing public even more precarious, the study suggests. Since most Internet companies have yet to turn a profit, they cannot be valued under commonly accepted methods, such as the price-earnings ratio, which measures a share price relative to the amount of money the company makes, and typically has been a good way to judge if a stock is fairly valued. In the absence of earnings, all sorts of new ''metrics'' are being used, and analysts may be free to use the one that puts a company in the best light. ''Many companies,'' the study says, ''... are actively promoting the metrics that would make their stock appear attractive relative to their peers. Thus, story or spin is increasingly important for both analysts and companies.'' One Internet company official said the Internet ratings process can work in a backward fashion in which analysts seek a rating that would be consistent with a stock's performance. ''The basic ongoing joke is that they try to find a creative way to justify the valuation that they know is going to happen in the marketplace,'' the company official said. ''They (the analysts) come up with creative ways of doing it -- they'll look at multiples of revenue, multiples of customers, how much is the customer trading for, multiples of members, as well as earnings multiples. ... The problem they keep having is that a lot of these measurements conflict with one another.'' The study also notes that analysts are not the only ones who have the power to hype an Internet stock. The press is also highly influential and that Internet companies are savvy about making use of the press. Several of the companies and analysts interviewed for the study suggested that the Internet industry averages at least four times the number of press releases as normal businesses in more mature industries. In the absence of hard financial data, these releases often help boost a stock price.>>