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

To: Chuzzlewit who wrote (367)	5/14/1999 12:14:00 AM
From: musea	Read Replies (1) \| Respond to of 419

Chuzzlewit, What's interesting about the Morris method of valuing internet stocks is that 1)it is highly arbitrary and depends strongly on initial assumptions, 2)it doesn't seem to give reasonable results on other more mature companies and 3)it is considered significant enough to publish an article about it. This tells me that others are employing real dowsing rods. Your own suggested valuation has some generous assumptions built in even to arrive at the price of $30.74. One would need to argue that AMZN would essentially take over large new segments of internet commerce (with higher margin than book sales). This is happening to some extent, but it is far from clear that AMZN will be able to hold on to any territory it's staked out. What's not really clear at this point is how big the potential internet commerce universe will be. It will clearly transcend political boundaries, so the opportunities may indeed be enormous. Thanks for your concise summary. -musea

To: Chuzzlewit who wrote (367)	5/14/1999 3:42:00 PM
From: Joe E.	Respond to of 419

tulip

To: Chuzzlewit who wrote (367)	5/14/1999 4:06:00 PM
From: Joe E.	Read Replies (1) \| Respond to of 419

OK I said tulip, BUT, on your statement: "Let's try the valuation in another way. Let's assume that AMZN is a mature company -- one with no growth prospects. How big would it have to be to justify its price? Let's say that it would have a P/E of around 10. That means that it would need earnings of around $15BB. Assuming a 6% net margin, that would imply annual sales of roughly $250BB. Sales are currently around 1.4 BB. At a 60% growth rate how long would it take to achieve that level of sales? 11 years. Assuming that sales could actually achieve that amount, we are looking at a result 11 years out. That is to say, in 11 years the shares of AMZN might be worth $150 if all of our assumptions were true. How much would those shares be worth today? Let's start with a risk-free rate of return of 5.5%. Now let's add a risk premium. Let's use a very modest risk premium -- say 10%. Now let's discount those shares at 15.5% for 11 years. And the answer is: $30.74. " Let's try it with Coke. Let's say when Coke is all grown up is too will have a PE of 10. That means it would need earnings of about $17.5 billion. Assuming a 19% margin (98's margin), sales would have to be roughly $92 billion. Sales are currently about $19 Billion. At a 10% growth rate (the Value Line forecast is 8%, which itself is 1% greater than the sales growth over the last five years), it would take 16 years to reach that sales level. That is to say, in 16 years Coke might be worth today's price ($71) if Coke grew at that 10% level and our other assumptions are true. How much would those share be worth today. Starting with 5.5% risk free rate (maybe should use 5.6% today, but I'll stick with 5.5%), and adding a modest risk premium of 5%, we discount at 10.5%. And the answer is $14, or one fifth of the recent price. Can we say carbonated tulip?? Maybe it is wrong to assume that Amazon in 11 years or Coke in 16 years will have no growth left. What do you think??