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To: edamo who wrote (114923)	4/7/1999 10:46:00 PM
From: stockman_scott	Respond to of 176387

edamo: I found an interesting article on valuation. It may be wise to review it since some of us seem to be fooling around with those crazy internut stocks <ggg>. <<How to price Internet mania Even the experts struggle to value Net stocks Thursday, January 28, 1999 MARK EVANS Technology Reporter The Internet can be a Pandora's box for investors. In a market that involves rampant speculation, extreme volatility and stock prices with tenuous links to fundamentals, the Internet offers investment opportunities with plenty of risk. But just as Pandora was left with hope after releasing all the evil from her mythical box, the Internet also has the potential for huge returns -- if curiosity is supported by solid research. That's a challenge because the traditional tools used by investors and analysts to evaluate companies don't really apply to Internet firms. Many Internet companies have modest sales, if any, and are incurring large losses from investments made to develop, market and sell technology. In such cases, it's impossible to use well-known valuation ratios such as that of share price and earnings. Even if a company makes a profit, price-earnings can be a difficult tool to use properly -- Amazon.com Inc. has a price-earnings ratio of more than 1,800 -- a staggering number that offers little insight about its prospects. Steve Harmon, a senior analyst with Mecklermedia Corp. in Westport, Conn., said he's invented his own valuation tools because the old ones didn't work. This led to the creation of exotic metrics such as "theoretical earnings multiple analysis." This tool, developed by an analyst at BT Alex. Brown Inc., projects earnings by estimating revenue growth and the operating margins that a company is supposed to achieve when it eventually matures. Still, Mr. Harmon does use a couple traditional tools as a starting point before using Internet-friendly valuation techniques. One of the first things to review, he said, is revenue growth. Unless an Internet company has double-digit quarter-over-quarter growth or triple-digit annual growth, Mr. Harmon said it's difficult to justify a high valuation. The bottom line for fast-growing companies isn't as important in the early stages, he said, because it's more important to build mind, brand and market share than to produce profits. Another key issue is management and the ability to focus on a business strategy. So how do investors determine whether or not they should buy Internet stocks, and if they do decide to make a purchase, what criteria should be used? Brendan Kyne, a portfolio manager who oversees AGF Ltd.'s 20/20 RSP Aggressive Equity and RSP Aggressive Smaller Company funds, said many investors have become cautious about the Internet because of some sky-high valuations. But it would be a mistake, he said, to use that as an excuse to avoid the sector completely. He dismisses suggestions that the Internet has the same irrational exuberance as the tulip bulb craze in Holland in the 1600s. Instead, Mr. Kyne said investors must be selective to find stocks that are reasonably valued. One tool used to filter out the on-line haves from the have-nots is the ratio of market capitalization to revenue, a measure that provides a rudimentary snapshot about valuations. Using this methodology, he said Yahoo Inc. has a market-capitalization-to-revenue ratio of 85. In Canada, Bid.com has a ratio of only 2.2, while Uniglobe Travel Online Inc.'s is even lower at 1.6. based on expected revenue this year. The other part of the investment equation is when to sell -- an exercise with an enhanced sense of urgency in the Internet sector simply because these stocks can climb and fall so quickly. The rule of thumb, said Mr. Kyne, is to look at comparable valuations in the sector. If there's a stock that's cheaper and just as attractive, it's time to adjust your portfolio. Another, less-scientific selling signal, Mr. Kyne said, is when "we just feel the market is risky".>>