Please read this. The only thing missing is, @ the end it should close with, Those who control the float, control the stock price (it's time to add) Those who controll the float, control the stock price, until they've sucked you dry. Trust me.
Happy Sunday.
All that's going on here is a big market-hyping game being played by momentum traders on the Nasdaq.
The truth is, all that's going on here is just a big market-hyping game being played by momentum traders on the Nasdaq electronic stock market, which is where nearly all Internet stocks are listed. We'll get into that more deeply in a minute.
But first, an update on our Observer Internet Sucker's Index, which we introduced to much commentary, not all of it welcome, back in late April. At that time, the total market value of the 18 stocks in the index stood at $37.3 billion--more or less equal to the market value of the entire American publishing industry.
That seemed remarkable enough even then. But today, exploding prices for Internet stocks on Nasdaq had carried the market value of the Sucker's Index to an astounding $61 billion, or close to double the level only three months earlier.
We can now state--in the spirit of simply reporting the facts--that these 18 companies, with combined revenues of a mere $3.6 billion, are now worth twice as much as the entire American cable television industry, five times as much as the American advertising industry, and nearly as much as the sum total of the American aerospace and defense industry.
Is there anyone out there who truly thinks that sort of valuation is reasonable? Is there any living soul among us who honestly thinks the day may come a year from now when--to pluck an example at random from the index--PSINet Inc., an Internet service provider with 775 employees, $141 million in revenues and $65 million in losses, will be worth as much as, oh, let's say the Walt Disney Company?
Well, somebody does. At least that's how the media is reporting it, because wherever you turn these days, all you hear is "New Paradigm"-talk about how none of the old stock valuation methods are applicable to Internet stocks; it's a whole new ball game, played on a field where trees really do grow to the sky.
Consider the aforementioned PSINet Inc. During the 17 trading days ended July 9, its stock rose--for no fundamental business reason whatsoever--from $10.25 to $14.50 per share. That's a 41 percent increase in a mere three weeks.
What's wrong with all this, of course, is that none of these Internet companies are worth anywhere near what the media is reporting--and it doesn't take a brain surgeon to figure it out. What's happening is that sell-side analysts on Wall Street--many from respectable firms--are befuddling the public with happy-faced valuations that fail to point out the difference between a company's "shares outstanding" and its "public float." For companies listed for trading on the rob-you-blind Nasdaq electronic stock market, this distinction is utterly critical to a proper understanding of a company's true worth.
Though I suppose there are still some people living along the upper reaches of the Zambezi River who haven't yet heard of "IPO's," these bongo boards of the late 1990's are not as well understood by investors as they should be.ÿ
None of these Internet companies are worth anywhere near what the media is reporting. Many investors don't seem to understand, for example, that by the time an initial public offering comes to market to sell, let's say, three million shares of a company's stock at $10 per share, company insiders may already collectively hold 20 million or even 30 million unregistered shares they were issued for mere pennies when the company was just getting started.
Those shares can't be sold in the public market until they're registered with the Securities and Exchange Commission. But the fact that they might be registered and sold at some point in the future constitutes an enormous price-depressing cloud over the ability of the three million shares sold in the IPO to rise in value over the long term. After all, if the 3 million shares go up substantially, insiders will begin registering and selling their pre-IPO shares to cash in, and the forces of supply and demand will drive the price back down.
When smart investors speak of a company's "float," they're referring only to the number of shares already trading in the market. When they speak of "shares outstanding," they're referring to all the shares that might eventually be publicly traded if every share were registered, every warrant and option exercised, and so on.
The mistake Internet investors are making--and Wall Street is actively encouraging them to make--is assuming a company's real value is only represented by the price of its stock multiplied by the shares outstanding. When the vast majority of a company's shares are locked up in unregistered stock that simply cannot be sold without depressing the price, a substantial discount needs to be applied to the market price of a share to determine the company's real value.
How big a discount? In the case of these Internet stocks in the current runaway bull market, one might argue that individual investors can safely start with a discount based on the difference between the shares outstanding and the float. If the stock's float accounts for only 20 percent of the company's shares outstanding, the market price of the stock deserves an 80 percent discount--at least as a starting point--for determining the company's real worth. Granted, this is a totally arbitrary approach, and we're not suggesting there is any sort of arithmetic relationship between a stock's float and a company's overall value. But in a world in which utterly no valuations of these Internet stocks make any sense, this approach seems as good as the next. At least it helps get the price level back down.
Consider Amazon.com Inc., the Internet book retailer. This company went public in an IPO just 14 months ago, in May 1997, selling three million shares of stock to the public at $18 per share. But company insiders already held more than 20 million unregistered shares, options, and warrants at the time of the IPO, creating total shares outstanding of more than 23 million.
Early in June of this year, Amazon declared a 2-for-1 stock split, creating more than 46 million shares out of the initial 23 million. But of that 46 million, only about six million (the three million from the IPO, now doubled via the 2-for-1 stock split) are actually being traded in the market.
Nonetheless, the media has lately gone gaga over whether Amazon.com, with a stock price that on July 6 touched more than $140 a share, is worth roughly $7 billion, or twice the market value of Barnes & Noble and Borders Inc. combined. Yet on Wall Street, as in any other market, things are ultimately worth only what people will pay for them.ÿ By that measure, Amazon.com sure isn't worth even $4.95 billion, simply because 12 percent of its common stock wound up changing hands during the week ending July 10, closing at about $100 per share. It makes as much sense to argue the company is worth no more than $588 million because nearly 90 percent of its stock isn't trading at all.
Investors are being set up for the shellacking of all time when the game finally stops. Applying this discount-deflator to the absurd prices in the Observer Internet Sucker's Index, we come up with a real investment value of only $26 billion instead of $61 billion for these 18 companies--and if you take America Online Inc. out of the picture, only $9 billion for the remaining 17 combined.
In a sense, the smart money on Wall Street is already doing just that--insisting on a huge discount from the market price when pumping real money into these companies in return for stock. Thus, when the Walt Disney Company last month bought 43 percent of Infoseek Corporation, the weakest of the four major search engine companies, they didn't pay anywhere near the $42 per share high that Infoseek touched on June 18, the day the deal was announced. Instead, when you work through all the fine print, it turns out Disney paid no more than about $11 per share for the stock, or about 25 cents on the dollar from what was then being quoted as Infoseek's market price. That's not much different from the 80 percent discount that the stock would warrant simply on the basis of its shares outstanding compared to its float.
The only people paying full fare are retail investors, and they're chasing prices that are being manipulated into the stratosphere by Nasdaq's notorious "momentum traders." These are speculators who take positions in hot stocks for a week, a day, an hour--sometimes just a few minutes--to profit from the very volatility they create. In just one trading day last week--July 6--momentum traders so discombobulated the market for Amazon.com that it leaped nearly 12.2 percent in value, to $139.50, on volume of 7.8 million shares, when there are only about six million shares in the float.
Even allowing for the double-counting that routinely goes on when Nasdaq dealers report transactions, it would still appear as if close to every Amazon.com share in the market changed hands at least once on that day. And July 6 was hardly unusual. In recent weeks, there hasn't been a trading day with volume below three million shares, and the more typical number has been five million-plus. Compare that to the whole of the previous year, from the time of the IPO onward, when daily volume almost never exceeded one million shares, and typically ranged below 500,000 per day.
In short, all that's been going on with the Internet stocks is a speculative binge, pure and simple--a binge fueled by a scarce supply of stock being chased higher and higher by momentum traders while everyday investors are being set up for the shellacking of all time when the game finally stops. > |
