Another interesting article on valuation specifically mentions Ariba.
In addition to internet co's, many of our gorilla co's have increased the float.
Commentaries
Speaking of Value
Timothy Vick -- Senior Analyst, Arbor Capital Management
Internet Companies Float Their Way Into Trouble
Any way you choose to slice their numbers, most Internet stocks are still not worth their present valuation in the
market. Most aren't even close, despite the 60 percent plunge in this sector the past two months.
It all comes down to simple mathematics. The amount of profits these companies would need to earn to justify their market values may never be attained.
Part of the reason stems from the generous flotation of stock. A number of newly-created Internet-related companies already have at least 200 million shares of stock outstanding, an enormous amount for companies barely five years old. American Online (NYSE: AOL) leads the pack with about 1.1 billion shares, followed by Yahoo (NASDAQ: YHOO) (613 million), Amazon.com (NASDAQ: AMZN) (337 million), online brokerage Etrade (NASDAQ: EGRP) (235 million), CMGI (NASDAQ: CMGI) (234 million) and Ariba (NASDAQ: ARBA)
(182 million). These figures don't include the stock options that aren't yet eligible for conversion.
By contrast, it took most of America's industrial giants 50 years or more to create a public float that large. JP Morgan
(NYSE: JPM) has just 176 million shares outstanding after nearly a century in business. Chase Manhattan Bank (NYSE: CMB) has 832 million shares outstanding; General Motors (NYSE: GM), 644 million; Motorola (NYSE: MOT) 600 million; International Paper (NYSE: IP), 414 million; Caterpillar (NYSE CAT), 356 million; Eastman Kodak (NYSE: EK), 316 million; Clorox (NYSE: CLX), 236 million; and Apple Computer (NASDAQ: AAPL), just 161 million.
How did their float swell like this? For one, most Internet companies lost so
much money as private businesses that they kept going to the well for financing, issuing more shares with each new
round. In addition, they generously doled out options to employees and executives rather than pay salaries they
couldn't afford. Some have even paid vendors and suppliers in stock in lieu of cash.
Once these companies went public, the float doubled or tripled with every stock split. The public kept bidding theirshares higher and higher, forcing management to split the shares and create a float large enough to cripple the
company's earnings potential.
For these companies, float will prove crucial to valuation. Many Internet companies have far too many shares
outstanding already to earn enough money to justify their current stock prices.
Yahoo must one day earn $613 million in net income (that's in one year), to post earnings of $1 per share. That
assumes its shares outstanding remain constant, which is doubtful. If Yahoo's profit margins one day average its current rate of 18 percent, which will be difficult, Yahoo's sales would have to be about $3.4 billion, five times its current size. If Yahoo was earning $1 per share today, it would trade for 129 times earnings.
Ariba needs net income of $182 million to get to $1 per share. At a profit margin of, say, 9 percent, that implies
yearly sales of $2.0 billion (current sales are $93 million). Amazon's annual sales, assuming a 9 percent margin,
would have to be $3.8 billion, twice its current run rate.
I gave these companies the benefit of the doubt on profit margins. In fact, profit margins for most Internet companies
may never approach 9 percent, let alone the 6.8 percent average of S&P 500 companies the past five years. The
bulk of Internet businesses are, after all, distributors and retailers in disguise. Profit margins for distributors tend to be
below 2 percent. A well-run retailer such as Home Depot may be able to sustain a 5 percent profit margin over time.
Judging from 1999 results, even a 2 percent profit margin may be a stretch. Amazon.com's operations currently lose
37 cents for every $1 of additional sales. Etrade loses 23 cents; Ariba, 67 cents. Inktomi, 34 cents; Ameritrade, 6 cents. By my estimation, some Internet
companies need sales to expand at least five-fold before they start taking advantage of economies of scale and break even.
So what are investors betting on? Simply put, more investors. Since these stocks lack any credible fundamentals, investors must hope that others pile in
after them to bid shares higher. Even at reduced prices, many of the Internet stock I track trade at prices that can't be
justified given their operating losses, sales trends, and shares outstanding.
And now that Internet stocks have swooned, a dangerous, vicious circle of valuation is being created. It has been
estimated that as many as 30 percent of the publicly traded Internet companies may need to issue more shares over
the next 12 months to pay their bills.
If their stocks remain depressed, some companies won't find a willing underwriter and will die on the vine. Others will have to issue a lot more shares to raise money than they could have when the stock traded higher. Each new share acts as an anchor on valuation. It makes it ever-more difficult for these companies to post the per-share earnings that can
justify a buoyant stock. |
