Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : e.Digital Corporation(EDIG) - Embedded Digital Technology -- Ignore unavailable to you. Want to Upgrade?

To: Jon Tara who wrote (11924)	3/30/2000 10:55:00 AM
From: bob	Respond to of 18366

From DABOSS on RB. VALUATIONS 101: A CRASH COURSE-SCENARIO FITS EDIG WELL !!! WHEN WALLSTREET DISCOVERS EDIG, ALL BETS ARE OFF... AND YOU ARE HERE !!! **************************** BOSTON CAPITAL Value of potential in high tech By Steven Syre and Charles Stein, Globe Staff, 3/30/2000 'You know what potential means? Potential means you haven't done a damn thing.' Bill Parcells, New York Jets Bill Parcells may know football. But with his hard-nosed attitude he would be lost in today's stock market, especially the technology end of the market. To tech fans, potential is everything. A company with potential might become the next Cisco or Microsoft. The fact that a company 'hasn't done a damn thing' is not a handicap. It is an advantage. As Michael Lewis put it in his bestseller on Silicon Valley, 'The New New Thing,' 'The most appealing companies are those in a state of pure possibility.' Why are investors so willing to believe companies with no track record are capable of such amazing things? And what would it take for the market to take off its rose-colored glasses and adopt a more 'Parcellian' view of the world? We plan to answer both those questions. But first it's worth taking a minute to show just how optimistic technology investors actually are. The best way to do that is to look at some tech stocks and calculate their price/sales ratio. You can't use earnings because many of these companies aren't yet profitable. You arrive at the ratio by taking a firm's market value and dividing it by annual sales. In other words, if a company has a market value of $10 million and $10 million of sales, its price/sales ratio is 1. A high price/sales ratio indicates a business that is valued on its potential. In effect, investors are saying: I know you haven't done much yet, but I am confident you are going to do great things down the road. The price/sales ratio of the Standard & Poor's 500 is about 2. Gillette, a successful old-economy company, trades at a price/sales ratio of 3. EMC, the Hopkinton data storage giant, has a price/sales ratio of 20. When you move to some of the newer companies, the ratios jump off the chart. Before yesterday's tech sell-off - the Nasdaq fell 4 percent - Navisite, an Andover start-up, had a price/sales ratio of 136; Sycamore Networks, a Chelmsford telecom company, 300; Akamai Technologies, a Cambridge maker of Internet infrastructure, 1,740. Akamai had $2.7 million in sales in its most recent quarter. When the market closed Tuesday, Akamai had a market value of $19 billion. Take that, Parcells. The reason for the bullishness is clear: people are infatuated with technology. 'Technology is making astronomical changes in the way we live our lives,' said Brian Grove, who manages a technology mutual fund for Vaughan Nelson in Houston. Technology is allowing businesses to cut their costs dramatically, even in old economy fields like steel and automobiles. Consumers can buy stocks and books over the Internet and they imagine the day when they will be able to do much more with their computers and cell phones. Jim Weiss, chief of equities at State Street Research, points out another reason for the enthusiasm about technology: a growing belief that businesses around the world will have to keep investing in technology in any kind of economic climate. 'The use of technology will grow as far as the eye can see,' said Weiss. Investors have grasped that. They also have seen enough bona fide success stories to know that great things are possible. A dollar invested in EMC in 1990 was worth more than $800 at the beginning of this year. All you have to do is find the next EMC and bingo, you've got it made. There's only one problem: there aren't going to be that many EMCs. The attrition rate in high technology has always been enormous and there is no reason to think that has changed. In fact, the failure rate could be higher this time around because Wall Street has funded so many direct competitors in so many different niches. 'Outright failures by some of the high fliers could puncture investors' confidence,' said Maureen Allyn, chief economist at Scudder Kemper Investments. Selectively, there is already some evidence of that happening. Many e-retailing stocks that were so hot just last year have already lost 50 to 60 percent of their value. The stock price of MicroStrategy, a high-profile software company, fell 62 percent one day last week after the firm was forced to restate its financial results for the past two years. Which group will get hit next? Will it be the auction companies, the business-to-business providers, the Internet infrastructure firms? Who knows? But logic suggests more disappointments are on the way. As Parcells understands, it is great to have potential, but eventually you have to get out on the field and show the world what you've got. A few players with potential actually become superstars; others turn out to be busts; still others wind up somewhere in the middle. It is the same way with stocks. Over time potential will give way to performance. When that happens, look for some of those price/sales ratios to come back to earth. Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can also be reached by e-mail at boscap@globe.com.