Guys, we met estimates:
Time for Net Stocks to Put Up or Shut Up
By Andy Kessler
Special to TheStreet.com
1/5/99 11:29 AM ET
For Internet companies, 1998 was a year of access to capital. In 1999, it will be a year of put up or shut up.
In 1998, anyone with a million-dollar annual revenue run rate was able to go public and raise capital to expand. Companies already public saw their stocks soar and either raised more money via secondary offerings or acquired new technology or services using stock.
It may be difficult to believe in such an environment that fundamentals do matter. But eventually, all companies that are provided access to capital have a day of reckoning, a moment when investors no longer assume growth, but begin to expect it. This is the put-up-or-shut-up phase.
I think the fourth quarter of 1998 is the first of many important quarters for Internet retailers, just as the fourth quarter of 1997 was an important quarter for portals -- when Yahoo! (YHOO:Nasdaq) turned profitable. The fourth quarter of 1998 was the first big online holiday season -- with huge marketing budgets not only on the Web, but in newspapers, magazines, on billboards, radio and even TV (rabid wolves indeed). With sky-high stock prices, most investors assume that a company's share price is predicting growth three to five years out. But perhaps, just perhaps, the stocks are also trying to tell you what fourth-quarter revenue might be.
In my Nov. 10 column, I suggested that many Internet retailers, led by Amazon (AMZN:Nasdaq), are buying growth by spending marketing dollars to generate new customers, who would provide incremental quarterly revenue. In 1998's third quarter, Amazon spent $37.5 million on marketing expenses and generated $37.7 million in incremental revenue over the second quarter. That is efficient marketing if you buy my assumption that all marketing dollars go toward generating new customers.
This efficiency or assumed efficiency of marketing dollars also turns out to be a great forecaster of future revenue. Figure out what a company might spend on marketing, estimate how efficient its marketing dollars are, and voila, you can derive an estimate of incremental revenue for the next quarter.
There is another great predictor of future revenue, and that is the share price of these companies. The higher the stock prices, coupled with the fundamentals of the company, the higher the expected future revenue.
There is obviously a lot of leeway on the inputs, so I decided to construct a proprietary model to predict fourth-quarter 1998 revenues for 32 different public Internet companies. To ensure comparability, I broke the universe into three groups: retailers like Amazon (I threw in Dell (DELL:Nasdaq) as well), portals like Yahoo! and advertising companies like DoubleClick(DCLK:Nasdaq).
The inputs to the model are second-quarter sales, third-quarter sales, third-quarter marketing expense, third-quarter gross profit, year-end share price and the number of shares outstanding. From these, I can derive marketing efficiency and marketing affordability as well as valuation relative to the group. I also noted whether a company has gone public in the past six months and perhaps had been underspending on marketing because it was resource-constrained. Armed with a vault full of the public's money, such a company is now better able to go on a marketing rampage.
Without giving too much away (the model is proprietary, after all), I then assumed as inputs some general improvement in efficiency, some assumed incremental growth based on share price and relative valuation to the group, seasonality and incremental spending for recently public companies. The output is an estimate of each Internet company's fourth-quarter 1998 revenue.
The table below is a summary of the model and its predicted results. Print it out and tick off each company as it reports its fourth-quarter results. In most cases, the fourth-quarter revenue estimates are higher than numbers published by analysts, but for a few companies, published numbers either don't exist or are hard to find.
TheStreet.com I-Quant Model
Company Price/sales** Revenue (millions)
3Q (actual) 4Q (estimate***) Sequential growth
Retail
Amazon (AMZN)* 26.2 $153.7 $217.2 41%
OnSale (ONSL)* 3.3 $57.8 $65.0 13%
E*Trade (EGRP) 8.2 $68.7 $81.6 19%
Beyond.com (BYND)* 13.3 $9.7 $12.8 32%
Digital River (DRIV) 27.0 $5.8 $10.1 76%
Ticketmaster Online (TMCS) 88.7 $11.4 $24.1 112%
Preview Travel (PTVL) 11.1 $5.6 $7.1 27%
eBay (EBAY)**** 11.5 $195.0 $244.7 25%
uBid (UBID) 38.7 $6.8 $15.0 123%
Cyberian Outpost (COOL) 7.9 $17.0 $24.2 42%
Egghead.com (EGGS) 3.6 $35.1 $40.2 14%
CDNow (CDNW) 5.5 $13.9 $16.9 21%
N2K (NTKI)* 4.4 $10.5 $12.5 19%
Cybershop (CYSP) 41.6 $0.5 $1.2 140%
Dell (DELL) 5.9 $4,331.0 $4,925.4 14%
K-Tel (KTEL) 1.2 $18.8 $20.1 7%
Advertising
DoubleClick (DCLK) 8.9 $20.8 $26.0 25%
24/7 Media (TFSM) 15.0 $5.5 $8.6 57%
Net Gravity (NETG) 17.2 $3.1 $4.5 48%
USWeb (USWB) 9.8 $34.0 $43.7 29%
Portals
Yahoo! (YHOO) 126.5 $53.6 $83.5 56%
Excite (XCIT) 12.1 $44.0 $52.1 19%
Lycos (LCOS) 23.5 $24.8 $30.7 24%
Infoseek (SEEK) 20.2 $19.2 $22.7 18%
CNet (CNET)* 17.0 $14.4 $16.4 14%
Broadcast.com (BCST)* 71.2 $4.5 $6.1 37%
SportsLine USA (SPLN) 10.1 $7.4 $8.4 14%
Infospace.com (INSP)* 98.3 $2.5 $4.2 66%
GeoCities (GCTY) 46.8 $5.3 $8.5 61%
theglobe.com (TGLO) 147.5 $0.8 $2.5 227%
EarthWeb (EWBX) 90.6 $0.9 $1.7 80%
Xoom.com (XMCM) 61.0 $2.3 $3.4 46%
*Velocity Capital and principals may own or may have owned positions in these companies. **Market value as a multiple of last quarter's annualized sales. ***Estimated revenue as calculated by the i-quant model. ****For merchandise sales, not commissions as reported.
Source: Company reports. Andy Kessler/Velocity Capital calculations.
Why do this? My sense is that we need a stake in the ground for companies to either beat or miss. This model is either brilliant or a dud -- i.e., use it at your own risk. It works if all the companies that report revenues above my model's estimate see their stocks go up and if all that miss my model's estimate see their stocks go down. It doesn't work if every stock goes up or down regardless of what it reports for the fourth quarter.
I think the timing is right, but I have to admit it may be a quarter or even a year early to run this model. We'll just have to see. If it works, two tickets to this year's Super Bowl will buy the model. If it doesn't, well, then we will try again next quarter.
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