The Internet Capitalist
SG Cowen Internet Research
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expectations that some investors have for
them.
If this does turn out to be the case (we'll await
another data point to see where we can draw
that line), we may see the first real opportunity
yet for one of those Internet corrections you've
been reading so much about. Of course, as
they did with Amazon, retail investors may
swoop in to undo whatever negative impact
this phenomena may have on Internet stock
prices, in which case, forget everything we just
said (or go straight to “Valuation Watch” for a
discourse on supply vs. demand).
Some Thoughts On Shifting Market Values
The sustained pace and sheer magnitude of the
rise in the price of the Internet stocks is
awesome, in the most literal definition of that
word. We once used to joke with fellow sell-side
analysts covering other sectors of the
market that, one day, every company would be
an Internet company at some level, and the
only sell-side job left would be Internet
analyst.
Well, it's a short handful of years later, and it
seems that some derivative of that jab has
taken place; the Internet stocks have taken
over the stock market. The heart and soul of
the market we once knew, when discussion
and ownership of Coke, Gillette, GE, Disney,
and Chrysler had dominated the airwaves,
newspapers, and water-cooler chat, has been
torn out and replaced with AOL, Yahoo!,
Amazon, and Ebay. Last week's addition of
AOL to the S&P 500 merely formalized this
idea. And if you needed yet more proof,
Friday's market action provided it; AOL is now
the single biggest media company out there,
with an equity market value of $78 billion,
topping Time Warner's $70 billion.
Those of us who have been in the Internet sell-side
research game for the last handful of years
have been palavering on about the Net and its
importance for some time; we've dutifully paid
homage to its constructive and destructive
powers, summoning forth terms like paradigm
shift to explain the Web's impact on
consumers and businesses alike. This week we
can honestly say at this point that we're even
surprised and beguiled by the size and staying
power of this move. But, importantly, we still
think it has some roots in fundamentals and
not manias. As optimists and staunch
fundamentalists when it comes to financial
analysis, we are determined to plow ahead and
find the reason for such an astounding move.
Because we hold dear to the notion of efficient
markets, that idea that the markets collectively
know more than any single individual over
time, our first reaction to such massive growth
in shareholder value is often to ask the
question “What are we missing?” We take this
approach rather than the glass-half-empty
angle preferred by Internet bears that asks
“How much can investors be duped?” So with
Amazon up something like 80+ points in the
last few days (recall that that's equal to about
$240 pre 3-1 split points) and up something
like 77% year to date, we've been re-visiting
some of our long held assumptions about how
much shareholder value the Internet can create
and where that value can come from. We
started by asking ourselves whether all the
shareholder value created by these Internet
stocks has been created from nothing or has it
shifted away from other parts of the market.
To reset our selves, we first calculated the
equity market value of the top pure
Internet/new media companies (for our
purposes, AOL, YHOO, XCIT, SEEK, LCOS,
CNET, SPLN) and compared that figure (and
its growth over the last year) with the top
traditional media companies (Disney, Time
Warner, TCI, CBS, Gannett, Cox, New York
Times, Knight Ridder, and Viacom). One year
ago, the traditional media companies were
worth about $200 billion in toto compared to |
