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 : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: George Gotch who wrote (4946)	6/2/1998 10:34:00 PM
From: Candle stick	Read Replies (2) \| Respond to of 164684

Did you see the Forbes article by David Dreman in the May 18 th, 1998 issue? Amazon at 1746 times 1999 earnings is his first on the list of poor investments. K-tel is second. Both are considered International crapshoots. This is the second article in Forbes that I have seen in the last few months that specifically points out AMZN as a way overvalued stock destined to fall. forbes.com It's tulip time on Wall Street By David Dreman HAVE I GOT A GREAT INVESTMENT for you! It returns 3.6%-and that's aftertax, no less. What's more, earnings are growing at 6.7% annually. At that rate it will earn as much as a government bond in only 21 years. Of course, actual cash dividends paid will increase a bit more slowly. It will take 55 years to catch up with the payment on long governments. I don't seem to hear a lot of bids for this proposition. Except that a lot of people are buying this investment without knowing it. It's the S&P 500, which is proxy for the entire U.S. stock market. Footpronts of a mania Wall Street is the only place people ride to in a Rolls-Royce to get advice from people who take the subway. -Warren Buffett, New York Newsday Company Recent price P/E Present value of discounted future earnings3 10% 15% Amazon.com $87 1,7451 $3.46 $1.51 America Online 73 661 7.67 3.34 Netscape 25 6192 2.80 1.22 Qwest Communications 37 466 5.51 2.40 Lycos 62 3261 13.21 5.76 Yahoo! 118 2692 29.17 12.72 Intuit 51 255 13.89 6.06 Lucent Technologies 77 207 25.83 11.26 Shiva 10 842 8.27 3.60 Excite 66 681 67.39 29.39 E*trade 23 45 35.49 15.48 Price and P/E as of Apr. 23. 1 1999 estimate (negative trailing earnings and 1998 estimate). 2 1998 estimate (negative trailing earnings). 3 Discount rates are calculated as follows: The 10% rate includes a 5.9% discount rate on long government bonds plus a 4.1% risk premium; 15% rate includes a 9.1% risk premium. Earnings are assumed to grow at 50% for the first 3 years, 25% for the next 5 years, 20% for the next 6 years, 15% for another 7 years, and 7.5% thereafter. The magnitude of the overvaluation, using a standard earnings discount model (which discounts all future earnings to the present time to determine a stock's value), is staggering. For individual stocks it is far worse. Amazon.com, for example, trades at 87-1,745 times 1999 earnings estimates. Using a 10% discount rate on future earnings, it has a present market value of $3.46 a share; using the 15% discount rate, the value drops to $1.51. America Online, trading at a P/E of 661, has a present value of $7.67 a share at a 10% discount rate, and $3.34 at a 15% rate. No question, the estimates on individual companies can be challenged-but the studies on analysts' forecasts I have presented show that they are far too optimistic. The accompanying earnings discount model demonstrates pretty clearly that the hottest section of the market has reached mania proportions. Similar studies were done on Avon and Polaroid at the height of the two-tier market in 1972-73. At the time, most people laughed and said the model was out of date and didn't apply to stocks like these. The laughing stopped when the stocks lost 80% and 90% of their value. Even the S&P 500 and the blue-chip stocks are in a financial bubble the likes of which surpasses any I've examined in this century. When an investor gets only a 3.6% return on investment but expects the same investment to appreciate 20% or 30% annually indefinitely, something is very wrong. Back in the Holland of 365 years ago, people traded land, cattle, houses and ships to raise cash to put into rapidly appreciating tulip bulbs. Today we are cashing in CDs and government bonds to get a supposed better return in stocks. Who wants to grind away building a business returning less than 5% when they can get double-digit appreciation in the market-then or now? Abby Joseph Cohen, the most respected investment strategist of our day, has called the U.S. a "supertanker economy," while a couple of fellows at a think tank recently wrote that a 100 P/E for the S&P may not be too high. When I think "supertanker" at this point, I think of the Exxon Valdez. When will it end? Nobody can answer this question with certainty. Some thought tulips were overpriced in 1632, but that market continued its seemingly inexorable rise for another five years. I wrote in this column in the summer of 1987 that the Japanese market was at mania levels, but it went a lot higher before dropping by over 60%. Look again at the table. It calculates what today's sizzlers are worth, using a standard earnings discount model. No, I don't recommend dumping everything and going into cash; history shows that stocks are the best value over time, and there are taxes to consider. But don't put your cash into the market right now, and sell stocks such as those listed in the table. If you want to get into this market, buy only value stocks with multiples at a good discount to the averages. David Dreman is chairman of Dreman Value Management of Red Bank, N.J., and author of Contrarian Investment Strategies: The Next Generation. back to top \| Read more: By David Dreman Investment Columnists The Contrarian From May 18, 1998 Issue