Thread---The second half of the article on AOL,EBAY, ETC
ecember 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.
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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