When Texas was fighting for independence in the 1800s, the most memorable
battle was at the Alamo. The Texans were heroic. But it was enough and
after 13 days, the troops were decimated. But, of course, the Texans
ultimately prevailed and the army commander Sam Houston declared, “Remember
In a way, I think there could be a new phrase for Internet stocks: “Remember
Priceline.com!” While I think Internet stocks are undervalued, I
think they will probably continue to become more undervalued. Yes, markets
can be brutal. Who would have thought it would be possible to see Priceline.com
The lesson of Priceline.com is that despite large revenues, big backers and
a strong brand name, the stock price can be severely punished. Actually, I
think the Internet markets are undergoing a purge, taking away premium
valuations. In other words, I think the Internet leaders look particularly
Already, Yahoo! has come under immense pressure. And, I think, there is
But I also think Amazon.com
is in jeopardy of value deflation. Let’s take a look at some
of the parallels.
Priceline.com has been criticized for having a business model that does not
work. Well, in the case of Amazon.com, it is hard to make an argument that
its business model can be profitable. Traditionally, retail businesses have
low margins. Why won’t this be the same ultimately for Amazon.com? Is
being an online retailer enough to make this different? I don’t think so.
After all, it was interesting to see that Amazon.com teamed up with a
brick-and-mortar retailer, Toys R Us, in order to penetrate the toy
Another criticism of Priceline.com is that it is over-diversified. Simply
put, it is too difficult for a young company to be everything to everybody.
But Amazon.com suffers from the same problem. Already, Amazon.com sells a
plethora of goods, such as beauty supplies, and even power tools. Of
course, this has yet to produce any signs of profitability. In fact,
Amazon.com placed investments in a variety of online companies to enter
these markets. And, yes, these investments have seen huge value erosion.
But Jeff Bezos is not convinced that his diversification strategy is wrong.
He recently affirmed this sentiment.
But to me, it looks like Bezos is out-of-touch with the current reality. We
are not in the go-go days of Internet valuations. Rather, Internet
companies need to be pragmatic. Actually, a troubling aspect for Amazon.com
is that it floated junk bonds in order to finance its ambitions. As we saw
10 years ago when the LBO market imploded, debt can destroy companies.
Also, the economy is slowing and retail sales, as a result, are becoming
problematic. Look at Home Depot. Yesterday, the company announced it would
see a short-fall in its next quarter. The stock price lost 28% of its
Finally, let’s take a look at valuation. Currently, Priceline.com has a
$864 million market cap. The company expects to have about $1.3 billion in
sales this year, which gives it a sales multiple of 0.66. Now, Amazon.com
has a market cap of $8.9 billion and should have about $2.7 billion in
sales. Let’s assume that the company has a sales multiple that is at a
premium to Priceline.com: 1. What would the stock price be? Well, it
would be about $7.50.
But, as I’ve stated many times, I am bullish long term on the Internet
sector. But for the time being, it would probably be wise to avoid the
so-called blue chip Internet companies.