From TMF re: VC valuations.
Subject: Re: Financial Spreadsheet
Number: of 5150
Author: ManishAurora
no profile | no interview
Date: 7/25/98 4:08 PM (ET)
Any firm that has been in existence 3 years, and has shown as consistent a set of financial
performance as Amazon, can be modeled. If is a fallacy to believe you can set a $6 billion value on
a firm without financial modeling. This is economic nonsense. Sorry to put it that harshly. We are
talking about money. And amounts this size are not committed without a sense for future cash flows.
If things are as uncertain as they are with Amazon, THE DISCOUNT RATE RISES. And you
know what would happen to Amazon if the discount rate was set to create 30% (VC) returns? The
stock would be worth $3. At 14% expected returns (8.5% over 10 year treasury) pretty
reasonable, the stock is worth $30 with optimistic revenue projections. Even at these levels of
projections, 'executive bandwidth' is an issue. Beyond these numbers, expectations become
irrational. A corollary to this argument is that a lot of smaller firms in the same business should be
private.
Something else of interest is the price based on price to revenue. Given that stable net margins in
this business are below 5%, the price to revenue is likely to stabilize below 1. Think hard about this
one. Think until it hurts to think any more. TMF claims 15x revenues is a good price. I think less
than 2.5x currently is. To deserve 15x, they would need 30% net margins, the domain of MSFT, an
software monopoly. When do you expect that to happen for AMZN?
Cute article:
The Bore vs. the Bimbo
TECHNOLOGY
HEADLINES
"Sometimes I
feel like we
were real
schmucks for
building our
company the
way we did."
- Jeremy
Jaech,
Visio Corp.
Appearance, not performance, woos technology investors. (Michael
Dougan/Special to ABCNEWS.com)
Special to ABCNEWS.com
Imagine, if you will, the following midlife-crisis
scenario:
A man has enjoyed an uncommonly fulfilling
and productive marriage for 25 years or so,
growing, in concert with his wife, an impressive
family, household and retirement nest egg. They
have been particularly prudent with their savings,
investing cautiously in proven companies on the
premise that they were laying a reliable financial
foundation for their sunset years.
Just as they are looking forward to reaping the
rewards of their life's work, preparing for the
arrival of grandchildren and years of well-earned
leisure time together, he abruptly abandons her for
a gorgeous young creature who has bewitched him.
Now imagine this twist: The trophy wife has so completely
worked her wiles on her new husband that she gets him to
agree to throw away everything in his life for her and turn
over his wealth to her simply because she has promised him
that someday in the distant future, if everything works out
perfectly, they might have sex. Persuaded of the truth of that
promise in the face of abundant evidence to the contrary, the
man ruins himself financially, gets nothing-sexual or
otherwise-in return, and dies bankrupt, alone and forlorn.
As various software and Internet companies have been
issuing their quarterly earnings reports over the past few days,
it has been nearly impossible not to think of the nation's
shareholders as ruinously bewitched husbands, companies
making real products and turning real profits as abandoned
old wives and Internet companies as wily bimbos with nothing
to offer but their allure.
Two Companies, Two Paths
Surely American shareholders are caught up in this kind of
collective midlife-crisis epidemic. How else can you explain
the comparative-and illustrative-fates of two Seattle
companies, headquartered only four blocks apart, who have
gone in nearly opposite directions since issuing stock to the
public?
The first-Visio Corp.-was founded in 1990 by Jeremy
Jaech, one of the co-founders of the phenomenally successful
Aldus Corp. The company went public in 1995, its stock
trading at $6 per share (if you adjust for a subsequent stock
split). The stock has risen slowly in the last three years and
has remained in the low 40s for the past several months.
The other-Amazon.com-went public one year ago at
$12 per share and saw its value increase 12-fold in 12
months. Its market capitalization is $6.4 billion-more than
the combined capitalization of its two rivals, Borders and
Barnes & Noble, both of which have real stores, real
inventories, real assets and real profits. For the past three
months, it has astronomically outperformed every other
company on the stock market.
Check Out These Measurements
To look at the comparative valuation of Amazon.com and
Visio, you would think that the former was a profit machine
even more prolific than Microsoft, and that the latter was
barely breaking even. But Visio has consistently
outperformed Amazon.com in every respect but at the
gaming tables.
Visio has turned in 13 straight quarters of earnings and
profit growth, while Amazon has lost more money each
quarter even as its revenues have risen. Visio has steadily
increased its net revenue per sale while Amazon has rapidly
increased its net loss per sale. The latest quarterly numbers
for Visio? Revenues of $39.64 million, up from $23.5 million
at last year's corresponding quarter; net profit of $8.9 million,
up from $5.9 million a year ago; and $.28 per share in
earnings, up from $.18. Amazon.com, meanwhile, turned in
quarterly sales of $116 million, losses of $21.2 million-or
$.44 per share-and isn't expected to post an annual profit
until 2001.
Working Without a Net
I ran into Visio's Jaech a few days ago and asked him what
he thought of all this.
"Sometimes I feel like we were real schmucks for building
our company the way we did," Jaech said with a laugh. "It
seems hilarious now that I told people here that I wanted to
have at least four and maybe as many as six quarters showing
a trend toward profitability before we went public."
Looking back now, Jaech can see that the Net hysteria
was building as early as 1995, when Visio was preparing to
go public. Going through his presentation to a broker,
laboriously showing how the Visio product line-graphics
and diagramming tools for the Windows environment-was
gobbling up market share and building steadily toward
becoming a de facto standard, Jaech saw the broker's eyes
glaze over. Finally, the man interrupted with a question:
"Aren't you guys really an Internet company?"
The question stopped Jaech in his tracks.
"I felt like saying, `No.we're just a boring company that
sells real products to real customers for real profit.'"
Not the sort of enterprise, apparently, that will get
investors hot these days-when a hallucinator's promises
count for more than a visionary's profits.
Fred Moody is author of I Sing the Body Electronic: A Year
With Microsoft on the Multimedia Frontier. His next book,
The Visionary Position, is to be published in February 1999
by Random House. |
