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To: Chuzzlewit who wrote (218)	3/27/1999 8:55:00 PM
From: puborectalis	Read Replies (1) \| Respond to of 419

If it wasn't for the daytrading little guy there would be no lively market in the internet companies.It is their involvement that drives these stocks irregardless of profitability and logic.That's why your logic with AMZN doesn't hold water....profitability actually causes these stocks to cool off....it's the "perception" of future profit that drives them.

To: Chuzzlewit who wrote (218)	3/28/1999 9:57:00 AM
From: jbn3	Read Replies (2) \| Respond to of 419

re E-value-ating the e-tailers: Chuz, you stated ... 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. ... Query: will not the 'elimination of the expense associated with a physical presence', which potentially allows e-tailing to be so profitable, also greatly reduce the start-up costs of competitive ventures? By reducing or eliminating many of the physical presence costs, you have eliminated one of the major barriers which have historically acted to limit successful competition. I believe that, while it is true that the potential market is huge, the barrier to entry is so minimal in historical terms, that competition will serve to effectively limit margins and profitability in most e-tailing arenas. I think that this effect will be most pronounced in those areas in which the e-tailer merely serves to distribute an already finished product. just a thought... thanks, jbn3

To: Chuzzlewit who wrote (218)	3/28/1999 1:38:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 419

General Considerations Part 2 of an unknown number of parts A thought on how best to measure e-tailing profit For the reason given in the previous post, I think it is important to shift the metric we use to some measure of profitability that provides at least a modicum of matching, as does accrual accounting, but also gives weight to cash flow. I suggest that EBITDA may be convenient for these purposes. For those who are unfamiliar with EBITDA, it stands for accounting earnings before interest, taxes, depreciation and amortization. **** Some time ago a very astute post by Michelle Harris pointed me to what I have come to believe is at least one key strategy in successful e-tailing. Michelle's key was the concept of commodity. The meaning of the word commodity in this sense is a product that is fungible -- a product where branding is not important but where functionality is the primary driver for the purchase decision. I believe that one possible strategy for successful e-tailing is the elimination of multiple SKUs which leads to high inventory maintenance costs. Huge numbers of SKUs in Amazon's business model is one of the reasons it will be difficult to make this company profitable. Books and CDs are not fungible. If Amazon is out of a copy of Martin Chuzzlewit (God forbid!) a copy of Madam Bovary will not do! This leads certain e-tail companies to incur huge costs associated with the large number of SKUs. Now contrast that situation with Dell. Dell does millions of dollars worth of daily business on the internet. Like Amazon, Dell has a remarkably low CCC (around -8 days as I recall), but unlike AMZN, Dell is quite profitable. Consequently Dell sports an ROIC of around 180%. I believe this is a natural consequence of the combination of the limited number of SKUs, and the high price of a commodity. I submit that Dell is one paradigm for a very successful network-based business. I am sure that Michelle could be persuaded to discuss SCM at Dell at some length, and how that part of the model integrates with the internal inventory issues I raised. -- More to come --

To: Chuzzlewit who wrote (218)	3/28/1999 2:04:00 PM
From: Kevin Collins	Read Replies (1) \| Respond to of 419

CTC, I just started reading this thread today. I find your analysis to be excellent. If we (US) enter a period of high inflation, how do you think it will impact the "rehashed Ponzzi scheme?" What abount deflation? Kevin

To: Chuzzlewit who wrote (218)	3/28/1999 11:30:00 PM
From: dpk	Read Replies (2) \| Respond to of 419

Chuzz Good couple of posts from you re general considerations on valuing “internet stocks”. I agree with you that the routine application of NPV of FCF has problems with regard to e-tailing stocks. And your example of how some e-tailers are able to show near term positive cash flows while selling their products at less than their cost is indeed on target. These companies are taking advantage of the rapid growth in revenue and low or negative CCC numbers to mask poor business economics and some are clearly the net equivalents of a Ponzzi scheme. However, there are a couple of considerations that may justify the crazy economics. First, some of these companies claim that they do not mind losing a little bit of money on each retail transaction in the early stage of the game because they are trying to build net brands. And second, the advertising revenue they are/will be able to generate more than offsets the small loss on each retail transaction. Clearly, the veracity of such claims is difficult to confirm, as only time will tell whether net brands are defensible and what the value of brand equity is in the net world. And as you mentioned even Amazon.com is not yet profitable despite being in business for a relatively long time in net-years. By the way, I don't think the SKU point you make is quite correct. Of course, having fewer SKUs is a good thing, but Amazon does not stock all the books it supplies, it depends on the large book distributors which are its suppliers to do so. In fact, when you compare their inventory position to the predominantly brick and mortar booksellers like Barnes & Noble or Borders, Amazon can provide a better (or comparable, now that B&N and Borders have gone online) selection while carrying a much lower level of inventory. And as for Dell, given that they can customize computers to customer needs, they would have had to carry a very large number of SKUs, but in fact they carry very little inventory because they build to order and have a customer-pull based supply chain management system that enables them to have a negative CCC and a weeks worth of inventory. So the critical differentiator is not necessarily SKUs. And while commodities may be traded/retailed on the net, making money doing so especially using a medium (ie the net) that gives more of the economic rent to consumers is IMHO a losing proposition. On your other point regarding metrics for measuring value, an EBITDA multiple for a company, either on its own or in comparison with the multiples of those in its class may be a good way to think about a company's valuation (cable companies have been valued this way by many analysts), but it has two shortcomings. One, it is a point measure and hence ignores growth. And second, it does not reflect annual capital spending, which can be a big source of advantage for internet based companies vis-à-vis their bricks and mortar counterparts. I don't have a better metric though. So until someone comes up with one I will continue to use the NPV of FCF, although with a judicious dose of “what if” scenarios and a careful analysis of “what one has to believe for the price to be right”. Having said all this, I have to confess that I have come to a conclusion similar to yours that one has to look at other considerations, such as the characteristics of the company as well as of the business they are in to develop an informed opinion about the future prospect of a company. And I would like to share some of those thoughts with you and others on this board who may be interested, with the intent of testing my thinking and expanding on the discussion you have initiated. I will do so in my next post, I hope over the next couple of days. Apologies for the long post. dpk

To: Chuzzlewit who wrote (218)	4/16/1999 8:15:00 PM
From: Stockwizard	Respond to of 419

Chuzzlewit: have reviewed several of your posts. Agree with the excellent comments. However, as a financial analyst, you did your homework, but you left out two very important intangible factors in this posting: 1. Consolidation - Some companies do not have infrastructure or proper cash flow but are the correct 'fit' for larger companies. Amazon has the infrastructure and is gobbling up smaller companies thus providing the smaller ones with both the cash flow and the infrastructure. This is the characteristic of a 'net' company. No rhyme or reason, but the nature of the company can add to the nature and dominance of the larger company. 2. Excitement and future growth. A combination of sexiness and possibilities for future growth has investors picking the next Yahoo or Amazon. My pick here? Earthlink is now at the most attractive levels. If you ask me to give the financial basis? There is none presently. but the combination of earnings growth (or lower losses), sexiness, takeover possibilities, and its great management and infrastructure make this my pick to be the next rocket stock.