I think both are open ended funds. The straw?: "Behind a Thud in an Internet Stock Price. When InterTrust Technologies Corp., went public Oct. 27 at $18
a share, it was a model for a successful Internet start-up. A
maker of software used to manage the sale of digital content like music,
InterTrust has a clever business plan, strong partners and respected
management. The shares took off, closing at $187.25 on Dec. 8, buoyed
by positive analyst reports from three of the four brokerage firms that
underwrote the offering.
All investors had to do was wait for the bump-up in the share price when
a fourth underwriter, Citigroup's Salomon Smith Barney, issued its report
on the stock.
Then, a bombshell. On Dec. 15, Salomon issued its report. But instead
of serving up a buy rating, as underwriters almost inevitably do when
starting coverage of a stock they helped to underwrite, Salomon gave the
stock what it calls a 3S rating -- the equivalent of a lowly "hold."
Hold is precisely what shareholders did not do. They sold with a
vengeance, sending the stock down $33.375 in one day, to $121.6875,
a plunge of more than 20 percent. The stock now trades at $124.8125.
In the momentum-fueled world of Internet stocks, the event offered a
reminder of how investors can punish those that receive anything less than
exuberant plaudits. But it also offered insight into how analysts deal with
the challenge of valuing companies in the evolving Internet market -- and
the discomfort that some of them have with the notion of using those
valuations to determine their recommendations.
Richard Zandi, the Salomon analyst who wrote the report, praised the
company's management, business model and potential to dominate its
market.
Indeed, Zandi says InterTrust's net margins may eventually rival those of
Microsoft -- more than 40 percent.
In the end, he says, his hold rating came down to his price forecast.
According to his calculations, InterTrust should be trading at $170 a
share in 12 months. Since the company was already trading at $155 at
the time of the report, he concluded that it was already "valued to the
vision."
To arrive at his target price, Zandi estimated InterTrust's future market,
prices, margins and eventual growth rate, and discounted the resulting
earnings. Even a tiny change in one of the estimates could have had a
huge effect on his price target.
Indeed, valuing early-stage companies like InterTrust is, in the words of
one analyst, "more art than science." And that is one reason that the
other, bullish analysts disagreed with Zandi.
For his part, Todd Raker, an analyst at Credit Suisse First Boston,
Intertrust's lead underwriter, said he had moved away from assigning
target prices to early-stage companies because of the uncertainty.
"Doing a pure valuation call on early-market stocks is a very difficult task
to achieve with any level of confidence," he said. "I think what investors
should be focused on is finding very attractive business models that
generate a lot of cash."
Raker uses discounted cash flow analysis in his reports. But rather than
coming up with hard numbers, he computes upper and lower limits on
variables like market size and then comes up with a range of possible
values for the stock. He estimates that InterTrust is worth from $58 to
$200 a share -- an exceedingly wide range.
He says his current rating, a strong buy, is justified because he believes
his analysis to be conservative and because the stock is trading within his
range. In another report, Raimundo Archibold, an analyst at J.P.
Morgan, another underwriter, calculated a relative valuation for
InterTrust. He took a class of similar companies, looking at their revenue
multiples and long-term growth rates. That showed InterTrust shares
could hit $214 in the near term and $562 in the next 12 months --
although he does not characterize those numbers as official price targets.
(The fourth underwriter, Soundview Technology, called price forecasts "a
challenge" but nevertheless cited a price target of $250.)
Zandi said he had no regrets.
"One thing I hear from people who wring their hands at these valuations
is that it's ludicrous," he said. "But you have to do it -- you have to
decide whether to buy and sell these things." He added that Salomon
requires its analysts to assign price targets to stocks they cover.
Some investors who are focused on the Internet are throwing up their
hands at nebulous valuations. Peter Doyle, a co-manager of the Internet
Fund, said he and his staff did their own research. "We don't really use
Wall Street research in any measurable way, he said, "because the
research tends to be very subjective." |
