Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Internet Analysis - Discussion -- Ignore unavailable to you. Want to Upgrade?

To: dpk who wrote (214)	3/10/1999 4:50:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 419

dpk, thanks for the kind words and the tip. I'll try to chase down book. I guess this is the point I was trying to get Mary Pugh to bridge, because I'm having a lot trouble with it. Thanks again, CTC

To: dpk who wrote (214)	3/27/1999 6:00:00 PM
From: Chuzzlewit	Read Replies (6) \| Respond to of 419

dpk, I've been thinking about a somewhat different tack for the valuation issue, and I have decided that the NPV approach has some problems at the level of the e-tailer. Ultimately, the on-line malls like AOL will depend on a revenue stream from derived from stores that occupy the mall. So I began to ask myself the question: what business characteristics are likely to cause an e-commerce company to prosper? I have come to certain conclusions, and I would like to throw these ideas open to the thread (if there is still a thread) for comment and discussion. Some general considerations: 1. Clearly, the companies that provide infrastucture and support will prosper. Hardware, software, network security, web-page design, these companies should do well regardless of what other kinds of companies actually prosper; 2. Financial services should do very well. The shift to on-line banking, insurance and brokerage is a clear indication manifestation of this trend; 3. Retail is a mixed bag. I believe that the analytical focus ought to be the nature of the product sold. In the second part of this post I will discuss what I believe to be the distinguishing characteristics of the products. Why use accrual accounting as a metric? The principle advantage that e-tailers have over physical retailers is the elimination of the expense associated with a physical presence: rent, sales clerks, inventory carrying costs, etc. But the major saving will be in capital expenses. e-tail is poised to generate truly astounding gains because of the extremely efficient use of assets. This will manifest itself as very high ROIC and inventory turnover numbers, and very low CCC numbers. But the key will be the ability to generate economic profit. In a major departure from my usual analytical framework, cash flow, I think its appropriate to focus on profitability instead. The reason for this is the fact that extremely efficient asset use will result in the ability to live off of cash flow from suppliers in spite of unprofitable operations. Amazon.com is a good case in point. Essentially, it is able to buy merchandise on credit from suppliers, and sell the merchandise to consumers on a cash basis. Depending on the timing this scheme creates an immediate interest-free loan. By way of illustration, suppose you have an operation that sells a product at cost and is required to pay for the product in 30 days. Let us assume that there are no overhead or labor costs -- i.e. all costs are variable and simply refer to the cost of the merchandise. Let us assume further that dating from the wholesaler allows the company to pay for merchandise in 60 days and that the merchandise is drop shipped. So in month 1 if the sales are $100 we have a cash flow of $100. Now lets assume that sales are growing at 50% per month. In month 2 we have cash inflows of $150 (we now have a total of $250) and no cash outflows. In month 3 we have cash inflows of $225, and outflows of $100 for a net cash position $375. In month 4.we have inflows of $337.50 and outflows of $150 for a net cash flow of $187.50 and a total cash position of $562.50. All is well because the rapid growth fuels the cash flow which allows the company to grow. Try the same exercise with an 11.1% loss each month (e.g. $100 cost in merchandise generates sales of only $90) and you will discover that the scheme continues to work because the fuel is growth, not economic profit. Unfortunately, the scheme begins to fall apart when grow slows or stagnates. I think the forgoing is a fair representation of how many e-tailers operate. It is, in fact a rehashed Ponzzi scheme. -- more to follow -- CTC