OT YHOO
GST,
>>The bear case on all net stocks
First off, I have some difficulty with the idea of lumping all "net stocks" together. I specifically asked about YHOO, which you had specifically mentioned looking forward to shorting (via puts) a couple of weeks ago. I wouldn't expect a Cisco bull to defend Madge or Cabletron, and I think it is a little unreasonable to expect YHOO bulls to defend the valuations of every company which gets defined as an "internet" stock.
>>(1) These stock are
priced based on the notion that their growth rates are sustainable, which is, at best, a very risky bet,
and at worst, is enough to make you laugh till your stomach hurts.
1. Both in terms of usage metrics and cash flow, YHOO is growing faster than the published estimates from two years ago--and much faster than my own, overly skeptical estimates predicted. (The opposite is true for several of its competitors, btw, which lends some credence to the notions of network effects and increasing returns to scale.)
2. Periodically, one of my value-oriented friends will run YHOO through an earnings-discount model, come up with a value of 15 to 30 bucks, and say something cutting about newbie day traders and Dutch tulips. While value types have had a tough couple of years, and are entitled to any happiness they can find, let's think this through a little.
YHOO bottomed at 3 in 1996, so if the fair value, three years forward, was 15 to 30, it should have been a screaming buy, using the same methodology. Unfortunately, based on the numbers available then, it looked even more expensive on an earnings-discount basis. While it is to be expected that the numbers will become more accurate as YHOO matures, YHOO's overseas efforts, as well as the principle of network effects suggest that growth may accelerate for another 8 to 10 quarters at least.
>>(2) Net firms have bet the farm that
profitability can be achieved if you blow a huge wad of cash to 'get there first' and colonize your part of
cyberspace real estate -- again, a very, very dicey proposition in the long term.
Again, I have no problem acknowledging that the overwhelming majority of public net companies will go belly up. OTOH, the cash requirements of many of these companies is rather small. There are plenty of offline ventures which are, in their own way, as quixotic as even some of the third-tier internet companies; inevitably, they absorb a lot more cash.
>>Flip them, kick them, use them and abuse them -- I really don't care.
IMO, one of the most dangerous fallacies about YHOO, AOL, etc., is the notion that they have been run up by manic daytraders and momentum hedge funds. Price, over any period longer than a few weeks, tends to be determined by who is holding, not who is, to use your terminology, kicking, flipping, and abusing. The early runups in AOL, YHOO, and AMZN were attributed to daytraders buying odd lots on ETRADE, or Jeff Vinik buying sloppily to burn the shorts. While I am sure both occurred, the stocks wouldn't have held up as well as they have without support by folks like Alberto Vilar, Bill Miller, and (I'm blanking on the Janus guy's name). Whether you agree with them or not--and I often don't--you have to give them enough respect to assume they are operating on something more significant than mania or an elaborate greater-fool hypothesis.
Take care,
Ganesh |
