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To: David A. Irvine who wrote (12616)	12/18/1998 9:43:00 AM
From: ztect	Respond to of 44908

Interesting Read... Internet Stock Watch Dec 17 1998 2:52PM CST Archives... Finally A Valuation Tool For Internet Stocks by Blair G. Jeffery Senior Investments Analyst Outrageous price levels and fundamental valuations are the norm in this information superhighway generation of stocks. We have all witnessed the exciting success stories from the likes of Yahoo! {YHOO}, Amazon.com {AMZN}, and America Online {AOL}, but we are all equally puzzled by the absurd P/Es and prices of these same stocks. Just yesterday, Internet analyst Henry Blodget of CIBC Oppenheimer raised his long surpassed $150 price target on Amazon.com to an overwhelming $400/share. He stated that he was not in the business of changing his price targets every three weeks, so he beat his opponent at their own game and let loose on a price target that he thinks will not be achieved until late next year. Late next year? Yes, a rise of roughly $120 in a year would represent a massive 40% return over the next 12 months, but in comparison to the amazing 997% return the Internet bookstore has amassed over the last 12 months it seems like a rather down-to-earth prediction all things considered. I will be the first to admit that a near 1000% return is not impossible for a surging technology stock and maybe even within fundamental restraints, but for Amazon.com to attain such prestige without ever posting positive earnings and being loaded down with one of the industry's largest debt/equity levels it is becoming increasingly harder and harder to justify. Realize first that staunch fundamentalists like myself fear the unknown. Most, if not all, of these Internet stocks represent the unrevealed, so for apprehension to play a huge role in decisions for investors as large as Warren Buffett and as small as no-names like myself it is not a big stretch. Despite my concrete views on evaluating stocks for investment purposes, I have tried to learn and understand some of the more popular valuation techniques for the panaceas of these exorbitant values. I believe that I have found one that is not only unique, but that also makes sense. One of the most well-respected and experienced analysts on the Street, Charles Wolf of Warburg Dillon Reed, has been using a conclusion that works backwards to find a start-up Internet stock's value. The technique is known as Economic Value Added (EVA), a concept created by Stern Stewart & Company, a management consulting firm. The system revolves around taking a stock's price and working backwards to find the revenue growth rate needed to justify the value of that stock. The beauty of the technique is that it leaves you with a choice, is the revenue growth rate attainable or not? You decide that answer for yourself. The technique takes the stock price and multiplies it times its shares outstanding to get the company's Market Value (MV). The stock's earnings are then adjusted for start-up costs by assuming the company would make a 10% operating margin on all sales. Note: the reason Internet stocks are so challenging to valuate is that most have never posted positive earnings due to high start up costs. The 10% operating margin takes those start up costs out of the equation. The sales multiplied by the assumed operating margin of 10% represents the company's net operating income after taxes or NOPAT. We want to know what the NOPAT would be worth over the next 10 years. According to Mr. Wolf, a discount rate or cost of capital needed to generate these earnings has to be assumed. Because most Internet stocks are volatile, Mr. Wolf suggest a 15% discount rate. Take the NOPE and divide it by the discount rate to get the Current Operating Value (COV). The most important thing to the EVA is the equation below: Market Value = Current Operating Value + Future Growth Rate You already have the MV and the COV, so all you have to do is solve for the Future Growth Value. This is rather easy because all you do is subtract the COV from the Market Value and calculate at what rate revenues would have to grow to achieve a MV of that level. The answer is the rate at which revenues must grow over the next 10 years for that company to have a justified stock price. The equation also allows the use of this rate to find the exact sales level the company must have in ten years. An actual calculated example has been created on this attached page to save room and to keep things easy to understand. The calculation has been performed on 7 of the leading Internet stocks and the results have been tallied below. Company Ticker 10-Year Revenue. Growth Rate* Sales in 10 Years* Sales in 1998 Amazon AMZN 51.13% $22.201 billion $ 357 million America Online AOL 18.79% $15.552 billion $2,600 million Lycos LCOS 50.96% $ 3.446 billion $ 56 million Excite XCIT 43.82% $ 3.787 billion $ 100 million Yahoo! YHOO 56.42% $ 5.911 billion $ 67 million eBay EBAY 84.84% $12.965 billion $ 27 million Netscape NSCP 35.20% $ 5.830 billion $ 285 million * According to the calculations of Economic Value Added. The EVA analysis leaves us with a growth rate at which we can all decide whether said company will reach or not. For example, Amazon.com needs to grow revenues at a 51.13% rate each year for the next 10 years according to the analysis. Is this rate attainable? I say definitely not considering the extreme competition facing the Seattle-based bookseller, but you can decide for yourself. Borders {BGP}, Barnes & Noble {BKS}, and Books-A-Million {BAMM} have all three positioned themselves to compete big-time with Amazon and that is only in the book arena. Music stores such as Blockbuster and K-Tel {KTEL}have already brought in pressure for the CD business, so Amazon is just now starting to battle competition for their greatest products. It should be noted that I believe Amazon has some great potential in the future, but it is hard to justify a 51.13% revenue growth rate when the company is only now starting to feel the pressure of competition. In contrast, America Online must grow revenues at a pace of 18.79% over the ten year span. Considering AOL's increasing presence in the foreign markets and also taking into account their expected sales growth rate of 87.52% over the next three years, it is not a stretch to think they can make it. In closing consider this, Microsoft {MSFT}, one of the most powerful and successful technology growth stocks in recent memory, could only muster a 45% revenue growth rate during the last ten years. Can Amazon, Lycos, Excite, Yahoo, and eBay to name a few outperform Microsoft in the next decade? That is for you to decide. To email feedback on this article or any other, simply click the underlined name of the author at the top of the article. Also, be sure to list the title of the article in the subject line of your email. Disclaimer: Trading involves risk, including possible loss of principle and other losses. Your trading results may vary. No representations are being made that these techniques will result in or guarantee profits in trading. Past performance is no indication of future results.

To: David A. Irvine who wrote (12616)	12/18/1998 9:48:00 AM
From: Dixie7777	Read Replies (4) \| Respond to of 44908

I think Marty's idea of a brainstorming session is great. It will provide the potential of evaluating all trains of thought for the company without anyone having to suffer the possibility of coming up with a bad idea. Remember the process of *Brainstorming* says that there are no bad ideas and that the combination of 2 ideas usually creates a sum greater than the whole. It's a very stimulating process. I would suggest it be done in an open forum, such as the Yahoo Chat, and at a prearranged schedule with as many participants as possible. Someone should set the agenda for each "meeting" so that you not stray from the subject. Such as new venues for *The Card.* Books, videos, golf, (that's a great idea, who thought of that one?) etc. I will not be able to personally participate for obvious reasons. Possibly I will be able to "facilitate the meetings." Essentially keep it on track. Additionally, I would like to thank all those of you who continue to PM me (9 just last night and some very solid situations,) with their contacts and ideas for CCI clients. *Please keep this in the PM system,* in-as-much as it has now become necessary and highly important that no one with a contact or an idea that we're pursuing, pollinate to another thread participant. Please *do not* share it with each other. You will soon see as the days and weeks evolve there have been material events that have made thread participants "insiders" and that knowledge must be restricted to those parties exclusively. "Pollination" of that information will easily become illegal and have grave consequences on the specific individuals and very possibly on the company itself. There is far too much at stake with the potential we all have as shareholders to be on the wrong side of this issue. Once again, thanks for the great idea Marty. When do we start? Remember, please keep the sales ideas and contacts restricted to me in the PM system for the above stated reasons. Very important. Wishing you all a great and blessed holiday season. I sincerely believe the New Year will be prosperous for all of you. Rich