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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gaj who wrote (14314)	5/20/1999 10:57:00 AM
From: Carl R.	Respond to of 99985

gaj, thank you. Your post really got me to thinking about the interdependence of the various players in the internut area. Once you think about it, you realize that the entire internet area is in actuality a giant Ponzi scheme. A ponzi scheme is a scheme when money from new investors is used to provide returns for earlier investors. That pretty well defines what is happening in the internet area so far. Tons of money is pouring into the internet area in the form of venture capital and new IPOs. New companies need to establish a presence, so they buy hardware such as computers, routers, drive arrays, etc. They buy e-commerce software, web design software and services, web hosting service, and sales support software, etc. They advertise with other services to try to drive traffic to their site. These expenditures in turn make other companies grow, who can then IPO bringing in more new money. At some point the new money will stop flowing in like water, and the internet will have to grow based on sustainable growth of underlying business and consumer use. Thus perhaps the best indicator of when the spectacular growth will halt is when the rate of money flowing in from venture capital begins to slow. Once that happens the rate of growth will fall to a sustainable level, resulting in a collapse of multiples. This will in term bring the IPO money to a halt. With no new Ponzi money flowing in, some companies will see their growth rate fall, or even decline. Eventually though the growth of underlying consumer and business use will cause a new growth phase, this time at a lower but more sustainable rate. Here is a pathetic graph of my prediction: ' is Ponzi Dollars (IPO, Venture Capital) . is underlying use * is total dollars of internut sales = = = ********* * = **** * = *** * * = ** '''''''''' * ** . = * ''''' ''' * ** .. = * ''' ' * * ... = ''' ' * .... = '' ' ..... = ' '...... '' = ' .......' ''''' =' .......... ' '''' =............ '''''''''''' ======================================================== Now there is no scale here, and the "dip" could just turn out to be a period of flat sales, and there is no time scale either. Anyone care to comment on this thesis? To complicate matters further, I'd like to point out that the ramifications are very, very different for differing segments of the market. There are companies that are related to actual usage of the internet, which would be for example ISP's. If usage remains flat, their sales would be flat, if usage grows, their usage grows. Then recalling your calculus, there are companies whose sales are related to the derivative of usage. These would be companies selling hardware and software for the web. If usage is flat, their sales fall to zero (except for replacements, new developments), and if usage grows at a constant rate these companies have constant sales. To grow these companies need accelerating rates of usage (.i.e. exponential growth). Then there are second derivative companies. These companies need the derivative companies to have accelerating growth. To go to an example which taught me painfully the difference between these types of companies, let's look at cell phone use. A cell company would be the primary company, dependant on usage. A company like SPCT which makes transformers for towers is a derivative company. That is if cell usage is flat, they would have no sales, if usage grows linearly they have flat sales, and they only have sales growth when usage is growing exponentially. A second derivative company would be a company which made machines to make the transformers. With flat cell usage or linear cell usage they would have zero sales (except replacements). With exponential sales they have flat sales. Things need to be really exploding for them to grow. Thus they should be the first ones to show signs of trouble. In the internut area, the ISP's as primary providers will continue to grow. The first derivative companies would be hardware and software companies, for example SILK or CSCO or the semi makers. The second derivative companies would be the semi cap companies, I suppose. And since they are cooking now, I'd guess that the internut bubble isn't in any trouble for now. Any thoughts on this thesis, either? Can anyone think of any other good examples of 2d derivative companies that would be leading indicators of trouble in the internut area? Thanks, Carl (thinking out loud)