POINT OF VIEW:Technology Works Wonders
On Market Caps
By Shawn Young
NEW YORK (Dow Jones)--The promise of technology transcending traditional
business and physical limitations has dazzled investors, leading to huge market
capitalizations for proven money-makers and red-inked upstarts alike.
The market value of Lucent Technologies Inc. (LU), the former
equipment-making arm of AT&T Corp. (T), surpassed the value of its parent
last week, while Internet bookseller Amazon.com Inc. (AMZN) is close on the
heels of the profitable bookstore chain Barnes & Noble Inc. (BKS).
Amazon.com and Lucent couldn't be more different. Lucent, which supplies
exotic technology to giant corporations, is an earnings machine. Amazon.com
is a retail outfit selling a low-tech product through a high-tech medium and
losing money in the process.
But in a sense they couldn't be more similar. Both make the promise of
technology unshackled - in Lucent's case from a parent company that was
holding it back, and in Amazon.com's case from costly bricks and mortar.
"Lucent is the stock of the future," said Donald Selkin, research director at the
New York brokerage Joseph Gunnar. Investors who have spent as much as
$100 a share for Amazon.com in recent weeks clearly think the same thing
about it. Although Amazon.com, like most Internet companies, is a
money-loser, its revenue and roster of customers are growing faster than
sunflowers.
The same sense that the stock represents a sure bet on the future has helped
propel America Online Inc. (AOL) of Dulles, Va., which has more than 12
million subscribers and is profitable, to a market capitalization of $20 billion.
That's more than the $19 billion Walt Disney Co. (DIS) paid for Capital
Cities/ABC Inc.
AOL's market capitalization makes a long-established media titan like New
York Times Co. (NYT), which has a market value of nearly $7 billion, seem
small.
With AOL, too, the feeling that the company is free from physical, business
and regulatory handcuffs contributes to the stock's allure.
"AOL can leverage its message in a way you can't when you have to crank up
the presses," said Steve Harmon, senior investment analyst at at Meckler
Media, a Westport, Conn., Internet news provider.
Print media are saddled with comparatively fixed identities and must worry
about physical realities like the cost of paper and the reliability of delivery
trucks, while broadcasters are ensnared by regulation, Harmon said.
Even though Internet-based companies' worries are ethereal by comparison,
their valuations are high, making the risks for investors real indeed.
"Some of this is pure caffeine," Harmon said. "There's a lot of expectation
built in. If it isn't met, white dwarves and black holes will suddenly appear."
The market capitalization of Seattle-based Amazon.com was about $2.2 billion
by Friday's close, just short of New York-based Barnes & Noble's $2.4 billion.
Lucent's market capitalization was $97.6 billion, compared to $97.2 billion for
AT&T.
AT&T, based in New York, has no regrets about spinning off Lucent in 1996,
said company spokeswoman Eileen Connolly. AT&T shareholders who got
Lucent stock in the spinoff have prospered.
"We absolutely believed it would increase shareholder value, and at a
minimum we can say that's true," she said.
When Lucent was part of AT&T, many potential customers that compete with
AT&T were wary of the supplier, for obvious reasons. Freed from that
restraint and from the problems that beset AT&T's long-distance business,
Lucent's stock has more than quintupled since its initial public offering. Its
earnings have beat expectations every quarter since the spinoff.
Although some say Lucent's stock has gotten ahead of itself, the Murray Hill,
N.J., company's projected earnings growth appears to justify its market
capitalization, said Selkin of Joseph Gunnar.
"Lucent was a hidden crown jewel in AT&T," said Larry Wachtel, market
analyst at Prudential Securities. "Now that it's free to compete, this is no
surprise."
"Amazon," he said, "is simply the phenomenon of the Internet."
That and the fact that the four-year-old upstart's revenue jumped to $87.4
million in the first quarter from $16 million a year earlier. The stock has gone
as high as $100, from $18 at the initial public offering last May.
"The interesting thing about Amazon.com is that they have solved the problem
of how to get people to BUY on the Internet," wrote one bullish day trader
who responded to an Internet query about why people are investing.
Supporters also said the company is a pioneer in Internet retailing that can
easily expand into selling other products, such as compact discs, as it has said it
will.
Short-sellers, who are investors who bet that a stock will fall, attribute much
of Amazon.com's market value to hype.
"It may be a nice Web site, but that does not make it a good investment," said
David Herbert, a private investor from Texas who has a small short position.
Critics say the company has minimal assets, is wildly overvalued and is
vulnerable to competitors, including Barnes & Noble, which also is on the
Web.
They think Wall Street's infatuation with revenue growth underplays the
company's loss, which widened in the first quarter to $9.3 million, or 40 cents
a share, from $3 million, or 16 cents, a year earlier as the company expanded.
Analysts had expected the company to lose 47 cents.
The tremendous revenue growth coupled with a smaller-than-expected loss sent
the stock into orbit. It gained almost 13 points the day after its evening
earnings release came out.
"I've never seen a stock where the company 'only' loses 40 cents and it goes up
more than 12 points," said Selkin. "It's the extreme case of the market
performing its discounting function and anticipating the future."
But whether a high-tech future will really liberate certain companies from
old-fashioned tribulation, the market can only guess.
-By Shawn Young; 201-938-5248. Johanna Bennett contributed to this story. |
