Doug, here is real bubble stuff:
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Barron's 2/14, A.Abelson Editorial:
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Havoc breeds panic and confusion, two conditions that
ÿÿÿÿÿÿÿÿÿÿÿÿÿ are pretty much the norm on Wall Street, anyway. As it
ÿÿÿÿÿÿÿÿÿÿÿÿÿ happens, last week's muss and fuss was accompanied by a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ touch of panic and a ton of confusion. Not a little of the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ latter engulfed giddy investors hot to exploit outfits that
ÿÿÿÿÿÿÿÿÿÿÿÿÿ might cash in on the Internet's suddenly glaring
ÿÿÿÿÿÿÿÿÿÿÿÿÿ vulnerability to the forces of mischief and mayhem.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Mostly, this mad rush to find
ÿÿÿÿÿÿÿÿÿÿÿÿÿ those companies that had discovered the magic
ÿÿÿÿÿÿÿÿÿÿÿÿÿ software to thwart the hackers, smurfers and other
ÿÿÿÿÿÿÿÿÿÿÿÿÿ marauders of the Wild Webÿ resulted in an outbreak of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ mistaken identity. The shares of companies with "guard" in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ their name -- not a few of them purveyors of underarm
ÿÿÿÿÿÿÿÿÿÿÿÿÿ deodorants -- were snapped up. And so were the stocks of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ companies barely equipped to receive e-mail much less
ÿÿÿÿÿÿÿÿÿÿÿÿÿ prevent even a bumbling online troublemaker from doing
ÿÿÿÿÿÿÿÿÿÿÿÿÿ his thing.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ A company that is certainly in neither category but
ÿÿÿÿÿÿÿÿÿÿÿÿÿ nonetheless seems to have been the subject of some
ÿÿÿÿÿÿÿÿÿÿÿÿÿ kindred misapprehension is Keynote Systems. Keynote is
ÿÿÿÿÿÿÿÿÿÿÿÿÿ definitely involved in the Internet: It's a Website
ÿÿÿÿÿÿÿÿÿÿÿÿÿ monitoring concern that measures e-commerce
ÿÿÿÿÿÿÿÿÿÿÿÿÿ performance -- stuff like how long it takes to download
ÿÿÿÿÿÿÿÿÿÿÿÿÿ pages -- and supplies diagnostic services. What it doesn't
ÿÿÿÿÿÿÿÿÿÿÿÿÿ do, contrary to the widespread belief in the Street (as
ÿÿÿÿÿÿÿÿÿÿÿÿÿ evidenced by the spurt in the shares last week from 89 to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 125) is provide protection against cybervandals.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ However, even without the big boost courtesy of identity
ÿÿÿÿÿÿÿÿÿÿÿÿÿ confusion, the stock, as the eloquent chart tracing its
ÿÿÿÿÿÿÿÿÿÿÿÿÿ trajectory clearly demonstrates, has been a spectacular
ÿÿÿÿÿÿÿÿÿÿÿÿÿ winner since it went public in late September at 14.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Besides its Internet connection, exciting the momentum
ÿÿÿÿÿÿÿÿÿÿÿÿÿ masses has been enthusiastic investment sponsorship, a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sensible business plan (as the cliche goes) and, from all
ÿÿÿÿÿÿÿÿÿÿÿÿÿ reports, an able management.
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ A quick check, though, reveals that the company, still
ÿÿÿÿÿÿÿÿÿÿÿÿÿ some four months shy of its fifth birthday, has quite modest
ÿÿÿÿÿÿÿÿÿÿÿÿÿ revenues and, of course, no earnings. Which, for all we've
ÿÿÿÿÿÿÿÿÿÿÿÿÿ acclimated to a market cosmos of shooting stars, made us a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ tad more curious as to what, if anything, specific about
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Keynote inspired the great leap upward in the price of its
ÿÿÿÿÿÿÿÿÿÿÿÿÿ stock.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ In terms of satisfying our curiosity, we were in luck
ÿÿÿÿÿÿÿÿÿÿÿÿÿ because the company has registered an offering of nearly
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 5.5 million shares, including one million shares of new
ÿÿÿÿÿÿÿÿÿÿÿÿÿ stock. So we whistled up a prospectus for perusal. We also
ÿÿÿÿÿÿÿÿÿÿÿÿÿ did a little burrowing into analysts' reports, company press
ÿÿÿÿÿÿÿÿÿÿÿÿÿ releases and news stories.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Overall, we got the impression of a company that has
ÿÿÿÿÿÿÿÿÿÿÿÿÿ carved out a niche for itself in an interesting part of the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ online business, that's growing rapidly and that's
ÿÿÿÿÿÿÿÿÿÿÿÿÿ financially in good shape. But we also came away with the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ impression that the stock is absurdly overvalued.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ This latter impression was in no way diminished by the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ fact that the bulk of the stock to be sold is from insiders,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 3.75 million shares in all. Nor that a sizable hunk of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ insider holdings were purchased via exercise of options
ÿÿÿÿÿÿÿÿÿÿÿÿÿ (often within the past two years) at prices as low as a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ nickel or eight cents a share. To be fair, some officers have
ÿÿÿÿÿÿÿÿÿÿÿÿÿ options on stock granted not quite a year ago that are as
ÿÿÿÿÿÿÿÿÿÿÿÿÿ high as $8 or $9 a share.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ We found somewhat disturbing, too, empathizing as we're
ÿÿÿÿÿÿÿÿÿÿÿÿÿ paid to do with shareholders, existing and prospective, that
ÿÿÿÿÿÿÿÿÿÿÿÿÿ a massive number of shares are slated to leave the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ restricted zone and soon can be sold, if their holders so
ÿÿÿÿÿÿÿÿÿÿÿÿÿ desire. All told, this ample reservoir of potential supply
ÿÿÿÿÿÿÿÿÿÿÿÿÿ aggregates over 14 million shares, each and every one of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ which will be eligible for sale three months hence (another
ÿÿÿÿÿÿÿÿÿÿÿÿÿ seven million shares will be sprung from lockup a year
ÿÿÿÿÿÿÿÿÿÿÿÿÿ out).
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Now, we have no evidence that any of the holders of those
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 14 million shares plans to unload. On the other hand,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ there's no guarantee, except that afforded by common
ÿÿÿÿÿÿÿÿÿÿÿÿÿ decency and investment prudence, that they don't.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The prospectus also contains 10 pages of risk factors.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Many of these seem more obligatory than substantive -- but
ÿÿÿÿÿÿÿÿÿÿÿÿÿ by no means all.
ÿÿÿÿÿÿÿÿÿÿÿÿ For example, we attach more than passing import to this
ÿÿÿÿÿÿÿÿÿÿÿÿÿ bare-bones declaration by the company: "We have incurred
ÿÿÿÿÿÿÿÿÿÿÿÿÿ losses, we expect to incur future losses and we may never
ÿÿÿÿÿÿÿÿÿÿÿÿÿ achieve profitability."
ÿÿÿÿÿÿÿÿÿÿÿÿÿ And on that score, a glance at Keynote's balance sheet
ÿÿÿÿÿÿÿÿÿÿÿÿÿ disclosed an accumulated deficit of $12.7 million.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ We also are duly respectful of management's assessment of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ competition and, more particularly, the fact that
ÿÿÿÿÿÿÿÿÿÿÿÿÿ competition is growing. It singles out for mention such
ÿÿÿÿÿÿÿÿÿÿÿÿÿ rivals as Freshwater Software, Internet Resources Group,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Inverse Network Technology (owned by Visual Networks)
ÿÿÿÿÿÿÿÿÿÿÿÿÿ and Service Metrics (part of Exodus Communications) and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ alludes to possible future ones like CompuWar
ÿÿÿÿÿÿÿÿÿÿÿÿÿ HP-Overview, IBM's Tivoli operation, Mercury
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Interactive and Segue Software.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ So far, Keynote seems more than able to mix it up with its
ÿÿÿÿÿÿÿÿÿÿÿÿÿ competitors. But mounting competitive pressure, from the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ likes of Service Metrics and Mercury, could affect
ÿÿÿÿÿÿÿÿÿÿÿÿÿ measurement prices, and not for the better.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ That doesn't by any means exhaust our list of plausible
ÿÿÿÿÿÿÿÿÿÿÿÿÿ caveats about Keynote and its prospects. All such caveats,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ of course, are run-of-the-mill reservations that surround
ÿÿÿÿÿÿÿÿÿÿÿÿÿ virtually any new venture, and especially a new technology
ÿÿÿÿÿÿÿÿÿÿÿÿÿ venture. But isn't that the point? The market has endowed
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Keynote with a valuation that can be justified only if it isn't
ÿÿÿÿÿÿÿÿÿÿÿÿÿ a typical new business, prey to its share of the usual
ÿÿÿÿÿÿÿÿÿÿÿÿÿ vicissitudes.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ So where, from an investment standpoint, does that leave
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Keynote Systems?
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Well, to begin with, a promising fledgling of a company
ÿÿÿÿÿÿÿÿÿÿÿÿÿ with trailing 12-month revenues of a hair over $11 million,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ rising red ink and a market cap of $2 billion.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The stock is selling at something like 98 times sales and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ (forgive us for even mentioning it, but old habits die hard)
ÿÿÿÿÿÿÿÿÿÿÿÿÿ over 40 times book value.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ While revenues have been climbing briskly, from a scant
ÿÿÿÿÿÿÿÿÿÿÿÿÿ $81,000 three years ago, losses have easily kept pace,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ rising from $600,000 to $7 million.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Moreover, even the bulls on the stock forecast Keynote's
ÿÿÿÿÿÿÿÿÿÿÿÿÿ red ink to expand to 80 cents a share this fiscal year (from
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 42 cents in fiscal '99) and over $1 next fiscal year.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ We cheerfully admit we haven't the foggiest notion what
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the stock should be selling at -- except a considerable slice
ÿÿÿÿÿÿÿÿÿÿÿÿÿ below last Friday's close of 116 and change.
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Message #17095 from Doug at Feb 16 2000 1:30PM
Tunica: A DAB Company down the road had a value of 20c, 10 workers, sales 0.25m, Income: Loss and 100m shares for the past 5 years.
Between Nov and now it has zoomed to $14.75 with the same Billboard.
This is the golden age of Bubbles.
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