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To: Chuzzlewit who wrote (329)	4/19/1999 4:06:00 PM
From: Dave Mansfield	Respond to of 419

Today a paradigm shift in the methods of valuing interenet stocks? Nah, but the day of reckoning is approaching.

To: Chuzzlewit who wrote (329)	4/20/1999 12:37:00 PM
From: Joe E.	Respond to of 419

Re Professor Siegel's article in the WSJ: "One of the fundamental tenets of economics is that value is created by scarcity, not by usefulness, need or desire. Water, necessary for the sustenance of life, costs pennies, but diamonds, used solely for adornment, fetch astronomical prices. " When he says value does he mean price? Not the same thing. What price was he paid for the article? Does that equate to the value of the article to him? What price did I pay for the article? Does that equate to the value of the article to me? "My reluctance to pay 700 times earnings for AOL is not at all because I am a "value investor" seeking low P-E ratios. In my book, "Stocks for the Long Run," I rejected the conventional wisdom that the "Nifty Fifty" of the early 1970s -- those high-flying stocks that carried an average P-E ratio of 40 -- were overvalued. Even from their market peak in December 1972, many of these firms, such as Philip Morris, Pfizer, Bristol-Myers, Gillette, Coca-Cola, Merck, American Home Products and Pepsi, outperformed the S&P 500 over the next 25 years. But none of the firms that outperformed the market had a P-E ratio in excess of 60 in 1972, and even the most deserving stock of this original group, Coca-Cola, would have been overvalued at a P-E ratio of 80." Pardon me, but in the 1970's these were all seasoned companies (Coke was about 50 years old then wasn't it?), with no chance to grow 100% in the next year or for the next several. Comparing them with these baby companies (AOL and Yahoo) that haven't even explored much of the demand space for their services yet is comparing apples to oranges. Say we compared the salary per paper published between Mr. Siegel and some brilliant new instructor working in an obviously hot and important area that Mr. Siegel and everybody else doesn't know much about (I'm thinking biology here, not economics). Well, the new instructor might seem expensive on a per paper basis, but since we are comparing apples and oranges, we can't really know whether the salary for the instructor is too high or not. We can probably tell with Mr. Siegel, since even though he is unique just like everybody else, his work is more easily compared with other professors of finance who know something about stocks.

To: Chuzzlewit who wrote (329)	4/21/1999 11:57:00 AM
From: jbe	Read Replies (1) \| Respond to of 419

Chuzzlewit, a question on a point Prof. Siegel left out. What is often overlooked is that a reasonably valued (even undervalued) stock can get sucked into the internet craze, when a portion (but just a portion) of the company's business is done on the internet. This is fine, as long as the craze continues; but when there is a pull-back (as there was the other day), the "undervalued" company's stock price tends to suffer just as much as the price of the "overvalued" companies. Let me give you a concrete example from my own portfolio. Earlier this year, for the sake of my portfolio's diversity (I owned no financials), I bought stock in a holding company called Southwest Securities (SWS), with subsidiaries that provide investment banking, investment advisory services, securities clearing -- and securities brokerage, including on-line (mydiscountbroker.com) brokerage. So it got sucked into the on-line brokerage craze. Now, SWS had -- and still has -- reasonable valuations (including a p/e of under 20), real earnings, a real profit margin, real ROE, etc. I find it difficult to evaluate financial firms, but nevertheless SWS looks much more solid to me than the firms that are perceived to be its competitors (e.g., AMTD, EGRP, JBOH, NDB), and cheaper than them all (including the profitable ones, like Schwab). On the one hand, I should not complain. At one point, SWS had gone up 100% from the date I bought it; it is now up only 50% -- but that is nothing to sneeze at, either. What bothers me, however, is that its fate is linked to on-line brokerages as a group. When the group does well, it will do well; when the group takes a hit, it will take a hit. When ETrade announces that its losses were less than expected (!!!), as it did today, stocks in the whole group will do well, however profitable or unprofitable they are individually. And if it had announced that its losses were more than expected, I am sure they would have all fallen in tandem. You ask (I am sure): what's your point? It seems to me that most of the enthusiasts who buy "internet stocks" (i.e., stocks in companies that do SOME business on the internet) PAY NO ATTENTION WHATSOEVER TO VALUATIONS, let alone real profits or real revenues. What they appear to be looking at is momentum ONLY. (Why else would a sleazy little firm like JBOH have a p/e of 550, as against SWS's p/e of 19?) The trick is to toss these stocks around, like just so many hot potatoes, to make as quick a profit as one can, and to get out as soon as possible. Analyses like Prof. Seigel's seem to me to miss this essential point. Your thoughts? jbe

To: Chuzzlewit who wrote (329)	4/21/1999 7:27:00 PM
From: kjhwang	Read Replies (1) \| Respond to of 419

I have attempted a simple model for aol valuation in light of Prof. Siegal's wsj piece regarding aol. Any feedback would be appreciated. Assumptions : Top line : Subscriber base increase parabolic, using aol growth, '96 - '98, & extrapolation to '05. Subscr. rev/yr = Subscr. base * (21.95*12) Ads, Commerce, Other: linear growth, using '96-'98 data, & extrap. to '05. Case A: Net Margins @10% a la Siegal. Case B: Net Margins modeled : Cost of Sales, parabolic extrapolation from 12 mo. 6/96-6/98 SG&A: parabolic extrapol. using 12 mo. 96-98 Marketing Costs: Fixed @400M R&D Costs: Fixed 200M MISC Expense : @ 20% of SG&A It appears that Prof. Siegal's assumption of 10% net margins is not validated by the trend, but if this is the case, clearly aol is severly overvalued. But if profit margins are near case B, aol may have price support fundamentally. I believe that the top line estimates are conservative since only the subscriber base at the beginning of the year is used to determine subscriber revenue (i.e. the subscr. ramp from Y '99 to '00 of 7M subscribers is not included in the calcs.). If the case B costs are realistic, & top line growth is attained (parabolic user growth with inelastic pricing, linear ads, commerce, etc) maybe aol isn't overvalued using average 5 yr growth of 80 -> PE ??? Or is this just fluff... Comments appreciated.. TCI [All units in M] Yr '98 Yr '99 Yr '00 Yr '01 Yr '02 Yr '03 Yr'04 Yr '05 Subscriber Base 8 13.86 21.09 29.95 40.41 52.49 66.19 81.50 Subscr. Rev. 2,161 3,650 5,556 7,888 10,644 13,827 17,434 21,467 Ads, Commerce 439 940 1,109 1,277 1,446 1,614 1,783 1,951 Totals 2,600 4,590 6,665 9,165 12,090 15,441 19,217 23,418 Rev. Growth 54.30% 76.55% 45.19% 37.51% 31.92% 27.71% 24.46% 21.86% CASE A : Net Costs (90% of Rev): Net Income 92 459 666 916 1,209 1,544 1,922 2,342 Income Growth -118.44%398.93% 45.19% 37.51% 31.92% 27.71% 24.46% 21.86% EPS $0.10 $0.49 $0.71 $0.98 $1.29 $1.65 $2.06 $2.51 Diluted Shares 934 934 934 934 934 934 934 934 Price($) (PE=40)$3.94 $19.66 $28.54 $39.25 $51.78 $66.13 $82.30 $100.29 CASE B: Costs & Exp. : Cost Sales(para) 1,678 2,466 3,438 4,594 5,934 7,458 9,166 11,058 Marketing (Fixed)400 800 800 800 800 800 800 800 R&D(Fixed) 100 200 200 200 200 200 200 200 SG&A(parabolic) 230 382 583 833 1,132 1,480 1,877 2,323 MISC(20% SG&A) 46 76 117 167 226 296 375 465 Total 2,454 3,924 5,138 6,594 8,292 10,234 12,418 14,846 Net Income 146 666 1,527 2,571 3,798 5,207 6,798 8,573 Income Growth 356.02% 129.37% 68.36% 47.71% 37.11% 30.57% 26.10% EPS 0.16 0.71 1.64 2.75 4.07 5.57 7.28 9.18 Diluted Shares 934 934 934 934 934 934 934 934 Price($) (PE=40)6.25 28.51 65.40 110.11 162.64 222.99 291.15 367.14 Price($) (PE=80)12.51 57.03 130.80 220.22 325.28 445.97 582.31 734.28