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Technology Stocks : DoubleClick Inc (DCLK) -- Ignore unavailable to you. Want to Upgrade?

To: ayahuasca who wrote (411)	10/28/1998 10:27:00 AM
From: Platter	Read Replies (1) \| Respond to of 2902

From Briefing.com.."Roadkill on the Information Highway The bigger they are, the harder they fall. Never was this statement more true than with the Price/Sales ratio. And never was it more important than with Internet stocks. The recent explosive rebound in Internet stocks has driven the price/sales ratios of many stocks into atmospheric levels. The Price/Sales ratio is the single most important statistic when calculating the implied growth rate of a stock. A high Price/Sales ratio indicates the market expects explosive revenue growth out of the company for as far into the future as the market can see. With Internet stocks especially, there isn't, usually, any way to calculate the upper limit. We are still so far from the maturation of the Internet that it is hard to calculate when growth will level off. But the moment a stocks shows any indication of someday reaching an upper limit, or just falls out of favor, its value drops rapidly, even if the company continues to grow strongly. For examples, it is worth looking at some of the roadkill already piled up on the information superhighway. Examples Briefing complied a list of some of the once-hot Internet companies that have fallen. All of these stocks had the following traits in common. •Price/Sales ratio of greater than 25 at the peak •Fallen stock price from all time high of at least 50% •TTM revenues currently higher than they were at the time of the stock peak, with no year-over-year quarterly declines in revenues In other words, each of the following stocks have seen their business continue to grow, in terms of revenue, which is pretty much the sole criteria for most Internet stocks right now. But, despite that fact, every one of these stocks entered a huge downward slide, in most cases, uninterrupted by rebounds. CompanyStockHigh PriceDatePrice 10-27% LossN2KNTKI34 5/84-14-985 11/16-84%CDNowCNDW394-14-988 3/16-79%VocalTecVOCLF33 1/410-16-976 7/8-79%NetSpeakNSPK33 1/84-2-987 23/32-77%CyberCashCYCH27 3/44-16-988 1/4-70%NetGravityNETG32 1/27-7-9810 1/4-68%DoubleclickDCLK77 1/87-2-9825 1/8-67%CheckPointCHKPF50 1/211-5-9723 1/4-50% Note that in the above table, most of the declines occurred over only six months. The longest time period is one year, for VOCLF. The following table shows that the lower valuations placed upon the stock is the primary reason for the stocks decline, as the revenue for each company has increased. Revenue is shown as Trailing Twelve Months (TTM) at the time of the high price, in millions. Price/Sales ratio is shown as P/S. CompanyStockP/S at HighP/S NowRev. at HighRev. NowN2KNTKI28317.232.3CDNowCNDW25324.843.3VocalTecVOCLF26413.820.1NetSpeakNSPK7795.48.6CyberCashCYCH72135.510.2NetGravityNETG6257.09.1DoubleclickDCLK33633.361.9CheckPointCHKPF36327.956.5 Some of these companies are twice as big as they were six months ago, but the stock price is 1/4 what it used to be. The Lesson What's the lesson behind these stocks? All of these roadkill stocks once had the same appeal that current hot Internet stocks have: virtually unlimited upward growth, with no foreseeable limits on the horizon. Investors rushed in to be a part of it. But, in each case, when sentiment changed on the stocks, the downfall was tremendous, simply because the valuations were so lofty. Even though the underlying businesses continued to grow, the valuation the market was willing to give them declined, with disasterous consequences for the stock price. The lesson therefore, is that the risk for many Internet companies isn't that they won't grow, it's that the market won't value the growth like it used to. Unfortunately predicting revenue growth is easier than predicting market sentiment. Is it possible for a stock like EBay (EBAY) to be twice as big six months from now, but the stock be half the price it is now? Hard to believe right now, but the history of the stocks above says that it is possible. Change in Sentiment is Key At lofty Price/Sales ratios, all it takes for a stock to collapse is a change in sentiment. Sometimes a single quarter of less than expected revenue growth is all it takes. Sometimes its an uncontrollable development. The internet telephone stocks have both been hit hard by the possibility of new laws requiring them to pay owners of the internet backbone for carriage of telephone calls. The laws aren't even enacted yet, but the effect is just as harsh, nevertheless. Sometimes its just a movement away from the stock, as active traders just move to the next hot thing. What to look for? Here's a short list of "Mack Trucks," any one of which could cause a sharp drop off in the valuation the market is willing to give, and make roadkill out of your stock. •A dropoff in the rate of growth, on a sequential basis. •A large, unexpected single quarter loss, or earnings shortfall •Advent of new law or regulation affecting the company •Advent of a new competitor •Emergence of a new, different "hot" sector or stock •Continuing drop-off in daily volume Most internet investors think the only risk is that revenue growth will slow, but the roadkill above shows that isn't what does it. It's the change in sentiment, and understanding what drives that isn't easy, but it is the key to knowing when to get out, when valuations are as high as they are for Internet stocks. "