Another from Marion:
THE 'NET CRASH BEGINS
By BETH PISKORA
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Is America Online worth as much as CBS or ABC? And is Amazon.com really worth
as much as Barnes & Noble and Borders combined?
In stock market terms, the answer is yes. The value of both these Internet-
related stocks has been pushed so high in the great cyber-rush of 1998, that
their market capitalization now matches or exceeds their off-line cousins.
But all great things must come to an end, and the time for unrestrained stock-
price growth for Internet stocks is at its end - at least for now.
In the last week, Internet stocks took a big tumble, with some of them losing
more than one-quarter of their overall value.
Amid all the hype and excitement, investors are being forced to wonder whether
their holdings really deserve the high valuations they recently achieved.
Is Doubleclick, for example, with its market cap of $816.6 million, really
worth almost as much as the world's sixth-largest agency, True North, with its
market cap of $1.39 billion?
That makes True North, a traditional advertising agency with over 300 full-
service offices and subsidiaries including Foot, Cone & Belding Worldwide and
Bozell Worldwide worth only 1.7 times as much as Doubleclick in investors'
eyes.
That's despite the fact that Doubleclick, which runs an Internet advertising
network, has never posted a profit, and garners 45 percent of its sales from
just one client.
It generated 1997 revenue of $30.6 million last year; True North had sales of
$1.2 billion.
And this is not the only example. Valuations of most Internet companies are
totally inconsistent with their underlying fundamentals.
In the case of online book retailer Amazon.com, it achieved a valuation at one
point this week of $5.4 billion, putting it ahead of traditional book sellers
Barnes & Noble and Borders combined.
Amazon lost $27.6 million dollars last year on sales of $147.7 million. Barnes
and Noble's profits topped $53 million on nearly $2.8 billion sales; Borders
earned $80 million on sales of $2.2 billion.
Of course, investors believe they're buying on the strength of future
prospects, not past results, but it's enough to get some well-known
strategists and stock-pickers worrying out loud about the state of Internet
stock valuations.
Take, for example, Mark Holowesko, hand-picked successor to the legendary
investment guru John Templeton. Holowesko, now president and chief investment
officer of Templeton Global Advisors, compares Internet stocks to the
Indonesian market before its recent crash.
For the record, the Jakarta Composite index is 37.42 percent lower than its
high, though it had lost as much as 70 percent of its value before bouncing
back up this year.
Holowesko predicts a similar fate for Internet stocks, though he declined to
mention any particular names that he thinks are most risky.
Others were not so reticent. Rick Berry, chief investment strategist at J.P.
Turner & Co., said he expects Yahoo!, Excite, Lycos, America Online and
E*Trade to lose at least half of their value in the next few weeks.
For Yahoo!, which this week saw its shares trade through the $200 barrier for
the first time, that implies a mere 100 price is in the cards. It's already
started the journey, closing Friday at 181, down 17 points for the week.
Ditto for the others: Lycos peaked at 99916 and ended the week at 67, AOL hit
113 mid-week, and ended at 112, E*Trade, which earlier saw 27, closed at 24
and Excite fell back to 81 from its 111 high.
"Even then they will be overvalued," said Berry. "You can't make money on the
Internet."
Berry also pointed out that investors left holding the bag on these stinkers
will not be the professionals.
"It's all retail investors who've been behind the run-up of the Internet
stocks," he said. "They just got excited about the word Internet. I don't
think a lot of institutional money has been going there. This was a mania and
I'm glad it's over."
Berry pointed out that even when an Internet company has a much lower
valuation than its counterpart in the off-line world, it may still be worth
too much.
E*Trade is one such example. Although Merrill Lynch, the king of brokerages,
has a market capitalization 36 times that of E*Trade, the small online broker
is still worth too much.
Merrill posts annual revenues that are more than 200 times that of E*Trade,
and Merrill's profits are 130 times higher.
America Online may boast that it has more users than CBS has viewers on any
given night, but advertisers are still wary of placing big dollars behind
online advertising. Nevertheless, AOL's market cap, at $24 billion, is larger
than CBS's valuation of $23 billion.
"You're seeing classic reversal patterns in the Internet stocks," said Peter
Green, technical analyst at Gruntal & Co., which he attributes to investor
realization that online retailing cannot be compared to traditional retailing. |
