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December 21, 1998
'Net Queen
How Mary Meeker came to rule the Internet
By Andrew Bary
Tables: Meeker's Universe | Thin Float
Just about everybody in America knows that Internet mania has been
sweeping Wall Street lately, ballooning the value of once-fledgling
companies to unbelievable heights. But only the cognoscenti realize that
a lot of this excitement has been whipped up by Mary Meeker, a
38-year-old analyst at Morgan Stanley Dean Witter. In Wall Street
parlance, Meeker is known as the "axe" for the Internet sector, meaning
she is the most influential analyst around. Indeed, for big
institutional investors, an Internet stock hasn't arrived until it has
Meeker's stamp of approval.
"An awful lot of analysts have never met a stock they didn't like. But
Mary has done a brilliant job of identifying the winners, the ones that
go up tenfold," says Roger McNamee, a partner at Integral Capital
Partners in Menlo Park, California.
While most analysts are happy to have recommended a single stock that
goes on to climb tenfold, Meeker can claim four: America Online, Dell
Computer, Compaq Computer and Microsoft. Her current favorites include
Yahoo, Amazon.com, eBay, AOL, @Home and Microsoft.
Says Pamela Cutrell, a vice president and analyst at Essex Investment
Management in Boston, which has sizable Internet holdings, "When Mary
speaks, people listen."
Meeker's power stems from the fact that the world of Internet stocks is
full of potential yet fraught with danger, too. No one really knows what
some of these stocks will be worth a year from now. For that reason,
investors in Internet stocks are always eager for guidance.
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A Sample of Meekerisms
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Unlike analysts in most other sectors of the stock market, Meeker
doesn't have the luxury of measuring her stocks against traditional
yardsticks like, say, the relationship between a company's stock price
and its earnings per share. After all, most of the companies Meeker
covers don't have any earnings, and they might not for years to come.
Meeker bases her stock predictions in large part on her broad vision of
the future. Two years ago she wrote a book predicting that the Internet
would take billions of advertising dollars away from TV, radio and print
media, and last year she wrote another one explaining how the 'Net would
evolve into a shopping mecca, competing against traditional retail
stores.
At Morgan Stanley, Meeker regularly offers her market intelligence in
research publications and in E-mail messages, always using her trademark
breezy writing style. Of Yahoo, for example, she said last spring, "Hmm,
what's the value of leadership in the fastest-growing medium in the
history of the planet?" In a recent yearend outlook piece, she wrote
that stocks of the Internet leaders are "yes, cheap. Why? It's simple;
the market opportunities are really large."
Meeker has been criticized as a cheerleader for Internet stocks, but so
far her predictions have been dead on. Her biggest success was getting
investors into America Online when it was trading at $2 in late 1993.
Since then, the stock has shot up to $105, giving the firm a market
value of $50 billion, more than that of General Motors.
Known as a workaholic, Meeker often puts in 16-hour days, dividing her
time between her office in Morgan Stanley's headquarters near Times
Square and her apartment on Manhattan's Upper West Side. Clients say
they sometimes get an E-mail from Meeker in the middle of the night with
her latest view on some 'Net stock. She travels frequently, spending
about half her time on the road visiting companies and clients.
Meeker is so valuable to Morgan Stanley that she's reportedly one of the
best-paid analysts at the firm, with a compensation package of perhaps
several million dollars a year.
She could be better known by the public at large, but Meeker has chosen
to keep a relatively low profile. Even her top institutional clients
find it difficult to reach her on the phone. Preferring to focus on her
research, Meeker doesn't speak often to the press, and she appears only
rarely on CNBC, which she calls the "MTV of my generation."
As a student of financial and economic history, Meeker is well aware
that a lot of smart people feel the current Internet mania is one of the
great Wall Street bubbles. But she isn't ready to pull the plug: "I am
concerned about high stock prices in the near term, but if the companies
can execute, I'm not concerned about high prices long-term at all."
When we interviewed Meeker in her cluttered office, strewn with piles of
paper and software boxes, we asked why individual investors have been so
quick to see the value in Internet stocks, while big institutional
investors have done so only grudgingly. "It's partly the Peter Lynch
thing," she responded, referring to the Fidelity titan's advice to buy
stocks in companies whose products you like. "If you're getting your
news on Yahoo, watching the Clinton testimony on Broadcast.com, just
bought a mirrorball, as a friend of mine did, on eBay, and are doing
your Christmas shopping on Amazon, you're more inclined to buy the
stocks."
One of her bullish arguments for Internet stocks is that, eventually,
institutional investors will jump on board in greater numbers. The
reason: Almost 90% of all professional money managers are trailing the
Standard & Poor's 500 Index for the second straight year, partly because
the vast majority haven't owned what she calls the "Nifty 'Nets."
Meeker's detractors say she's trying to justify untenable valuations by
changing the rules of the game and ignoring the manifold risks of the
'Net. A glance at the accompanying table, which lists the 20 most
valuable Internet companies, shows just how high those prices have run.
Yahoo, for example, traded last week at 212, a staggering 500 times
projected 1998 profits and more than 100 times revenues.
Morgan Stanley's Internet Index, an unweighted average of 68 'Net
stocks, has tripled this year, with leaders like Amazon, Yahoo and
America Online rising far more than that.
'Net mania was particularly strong last week as Amazon surged 61 to 284
after an analyst at CIBC Oppenheimer lifted his price target to $400 a
share. At that price Amazon is now valued at $14 billion, making it the
sixth-most-highly valued retailer in the country-bigger than May
Department Stores, for example, and just a bit behind Sears Roebuck.
Meanwhile, Yahoo shares were up 16 1/2 during the week, to 212; eBay
rose 60, to 252 and America Online increased 13 1/2, to 105 1/2 . This
recent spurt has been powered by expectations for strong Internet
commerce this Christmas, which could total $10 billion or more, 10 times
what it was a year ago. Meeker says, "When people see the Christmas data
from the companies in January, they will say 'Wow!' "
But even 'Net fans like McNamee feel valuations have gotten stretched.
"The mania is in full swing. Things have gotten more loopy than they
were before," he said last week. "At some point, it will be appropriate
for Mary to become less bullish. It'll be interesting to see how she
handles it." Adds Essex's Cutrell: "We dread the day when she decides to
downgrade the stocks."
Meeker freely admits that the risks are high, but so are the
opportunities, she insists. "Nothing has happened like this before. It
just hasn't. TV and radio took years to develop. This has taken
virtually months." She notes that Internet users have mushroomed to 80
million today from just five million in 1995. The number could hit 150
million by 2000, she says. And even with the manifold increase in the
market values of companies like Amazon, Yahoo and eBay, she points out
that the market value of the entire Internet sector, excluding America
Online, totals below $90 billion. That's less than the market value of a
good-sized drug company like Eli Lilly.
Meeker's approach is to try to identify the emerging industry leaders
and not let seemingly high valuations scare her into backing off. Her
view is that winners often get stronger, appropriating market share and
profits from weaker players. One of her basic investing rules is simple:
"How big's the market, how high is a company's market share, and who's
No. 1?"
Unlike most analysts, she doesn't set price targets for her stocks
because she doesn't want to be constricted by them. Microsoft, for
instance, has risen more than 300-fold since its split-adjusted IPO
price of 39 cents a share in 1986. Getting out of Microsoft along the
way because it hit some artificial price target would have been a
mistake, she says.
"Mary realizes that great stocks are rarely cheap," says Russell
Grandinetti, a former Meeker assistant and now chief of investor
relations at Amazon. "She knows that the one thing about tech investing
is that whatever happens next year isn't what you thought would happen.
So she wants to bet on the best management teams."
Byron Wien, Morgan Stanley domestic strategist, says Meeker recognized
early on that investors would be willing to value Internet companies
based on revenues and not profits as long as there was a hope of
substantial profits in the future.
The Internet industry is still relatively young, but Meeker says winners
already are emerging. "In some categories, it's already 'Game over,' "
she avers. "I wouldn't want to be competing against Yahoo. I wouldn't
know how."
Cover Story, Part 2
December 21, 1998
Cover Story, Part 2
Cover Story, Part 1
She predicts that 1999 could be a year of industry consolidation as
smaller companies merge to compete against Yahoo and established
retailers threatened by E-commerce seek a Web presence. Meeker believes
that Barnes & Noble will continue to have a tough time playing catch-up
in Internet bookselling against Amazon, which controls about 90% of the
market and is using that position to sell music and other goods.
When it comes to Internet technology, Meeker literally wrote the book.
In late 1995, when the Internet was viewed mainly as a medium for
technogeeks and an outlet for pornography, she co-authored a tome called
the Internet Report, which laid out a blueprint for the 'Net industry's
growth, citing the histories of other mass media like radio and TV. The
book sold about 15,000 copies in bookstores and has been downloaded more
than 100,000 times from Morgan Stanley's Website.
In late 1996, when Wall Street was wondering how anyone could make money
from the Internet, Meeker published a second book, the Internet
Advertising Report. She followed that up in the summer of 1997 with the
Internet Retailing Report, which argued that the medium provided an
"efficient and powerful new channel" for commerce, giving 'Net companies
a second source of revenues.
To get an idea how Meeker thinks, take a look at how she values Amazon:
The global book business generates annual revenues of $85 billion. Say
the total market expands to $100 billion in five years, while the online
segment of it grows to 10% of the market from 1% today. Even if Amazon's
market share drops to 60% of the online segment from its current 90%,
that means $6 billion in revenues for the company, up from an estimated
$600 million today. Next comes music, primarily compact discs and tapes,
which generate annual sales of $45 billion a year, and lots of other
areas that Amazon may choose to tackle.
Meeker admits she's been somewhat frustrated that Amazon hasn't "proven
that its financial model works." But she says Amazon's critics are
missing the big picture. "The point is: Given that the market
opportunities are so large, should companies be allowed to lose money to
seize the No. 1 spot?" Meeker says for Amazon, the answer is yes. And
the stock market clearly agrees with her.
Amazon's detractors say it has an outrageous valuation for a company
that operates in a low-margin business like bookselling. And now, they
scoff, Amazon is moving into an even lower-margin area by selling
compact discs, tapes and other music. "The problem is that people may
suddenly wake up one morning and say Amazon and other 'Net companies are
just retailers and value them at 30 times earnings, not at 200 or 1,000
times earnings," says Michael Murphy, publisher of the California
Technology Stock Letter. Jonathan Cohen, Merrill Lynch's Internet
analyst, opined last week that Amazon is worth just $50 a share. But
that didn't do much to dent investors' enthusiasm.
Murphy says America Online's success has done an enormous amount to
legitimize 'Net stocks because AOL showed that spending heavily to gain
the No. 1 spot can eventually prove profitable. At long last, AOL is now
capitalizing on its 14 million subscribers after spending more than $1
billion to build that base. Yet Murphy feels that other Internet
companies lack the advantages of AOL, which gets to collect monthly
membership fees from its 14 million users.
Yahoo trades at an even loftier multiple of earnings than AOL does, but
Meeker loves the stock anyway. Her view: "Yahoo's revenue generation
hasn't caught up with its importance as an organization." She cites the
appeal of Yahoo's 40 million monthly users to advertisers: "Yahoo has
cachet as the leading place, the coolest place, the best place."
Meeker began her career as a junior analyst at Salomon Brothers in 1986.
She joined Morgan Stanley in 1991 to cover software and
personal-computer companies like Dell, Compaq and Microsoft, and she
moved to the Internet companies in 1995 with the initial public offering
of Netscape Communications, a Morgan Stanley client.
Meeker concedes that she has made a few bad calls in her career, and one
of them was being late to start covering Yahoo, which she first
recommended in April, two years after its IPO. She jokes that her "buy"
recommendation on Yahoo read like a "Catholic confessional" because she
knew she had neglected an industry leader. Since her report, Yahoo's
market value has quadrupled to about $20 billion.
Determined not to make that mistake again, Meeker decided to recommend
eBay, the Internet's version of a flea market, on the day of its initial
public offering in September. Meeker wasn't deterred by the fact that
eBay was underwritten by Morgan Stanley's chief rival in the technology
area, Goldman Sachs. eBay was offered at 18, finished its first day of
trading at 47 3/8 and now stands at 252. Her view is that anyone selling
comic books, Beanie Babies or baseball cards wants to reach as broad an
audience as possible and eBay is the perfect medium. She feels it is
poised to capture a big chunk of the $100 billion collectibles market.
Internet mania has struck with a vengeance in 1998, partly thanks to
Meeker's enthusiastic reports.
That said, eBay's market value of $10 billion is enormous for a company
that is slated to have about $6 million in net income this year. This
seems crazy to Matt Stichnoth, editor of the Wall Street Companion, an
investment newsletter. Stichnoth recently asserted that eBay has been
profitable only because "it does essentially nothing in return for the
commissions it receives." He notes that auctioneers like Sotheby's offer
such basic services as the authentication and appraisal of goods,
something eBay does not provide.
EBay's ascent, as well as those of other Internet companies, has been
aided by the fact that they have "thin floats." This factor shouldn't be
underestimated. A thin float means that company insiders and others
control much of the stock, limiting the amount of stock in public hands.
As the accompanying table shows, the publicly available stock in eBay is
just 3.5 million shares, or only 9% of the shares outstanding. That
means it doesn't take a lot of buying by the public to levitate eBay's
share price. Other companies with relatively thin floats include Amazon,
@Home, CNet, and Broadcast.com. By contrast, companies like AOL and
Microsoft have a high percentage of their shares in the public's hands.
The danger to buyers in companies with thin floats is that the high
prices may prompt selling by insiders. For eBay, restrictions on insider
sales end in March. For the time being, however, the combination of thin
float and heavy involvement by short-sellers in the Internet stocks
could prove a big boost because the continued rally in the stocks is
likely forcing the short-sellers to buy back their shares and get out.
Their buying just sends the share prices higher. As the table shows,
shortsellers account for big chunks of the float in Amazon, eBay and
CNet.
Who will be the losers from the Internet's ascendancy? Meeker points to
Mattel, which last week shocked Wall Street with a projection of
weaker-than-expected profits and said it was buying the Learning Co., a
software maker. "That's a big deal because the root of Mattel's problem
is that kids are spending their time differently," Meeker says. To be
more precise, kids are spending more time with computers and playing
less with Barbie dolls and other toys. Mattel evidently believes the
answer lies in the Learning Co., which makes popular educational
software and computer games for kids.
Meeker predicts that from now on, every few months another traditional
company will announce pressure on sales or profits because of upstart
competitors on the 'Net.
Meeker is an Indiana native who got her college diploma at DePaul in
Chicago. She lives and breathes the Internet and is justifiably proud of
her role in helping the industry along. Colleagues say that's one reason
why she is still single. "It's been a busy five years," she says. "It
has been a special time and a special place. In my lifetime, there
probably will never be anything like this."
In her spare time, Meeker can be seen rollerblading or biking in Central
Park. In the summer, she likes to windsurf near her summer home in
Amagansett on Long Island's tony south fork. In a concession to age, she
has given up playing Ultimate Frisbee, which she did while studying for
her MBA at Cornell in the mid-1980s.
When Morgan Stanley lost a group of top technology investment bankers to
Deutsche Morgan Grenfell two years ago, one of the firm's top priorities
was retaining Meeker, as well as two other leading technology analysts,
Charles Phillips and George Kelly. With Meeker on board, Morgan Stanley
has managed to maintain a significant share of Internet-related
underwritings, including offerings this year by America Online, Amazon,
Excite and Broadcast.com. These deals have brought tens of millions of
dollars in fees to Morgan Stanley. The firm also is advising Netscape on
its pending merger with AOL.
Even Meeker says she is somewhat concerned about the high prices being
paid for Internet stocks. "When there's so much euphoria among retail
buyers, often it can be symbolic of an impending reversal," she says.
Meeker mentions, for example, a Manhattan hairdresser who is buying a
second apartment with profits from Amazon.
Meeker concedes that the Internet stocks could experience a letdown in
early 1999 if first-quarter sales fall well short of those that will be
reported for the fourth quarter, which will include heavy holiday
spending. Says Meeker, "I'd love nothing more than for the stocks to
trade down 25%-50% to make them more reasonable to buy, but that doesn't
seem to be in the cards."
Not in 1998, anyway.
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