Net Value

Internet companies cannot be valued in the same manner as off-line
companies. Traditional metrics such as P/E ratios are of little use
when most companies post large losses. The industry is instead focused
on building brands and obtaining market share. For the near future,
quarterly earnings will remain forsaken for long term growth and
business viability.

One of the factors driving the current Net stock prices and
valuations into orbit is a simple supply versus demand equation,
as large numbers of investors chase a small amount of available shares.
Take the for instance, the volatile, but extremely well-performing
shares of Red Hat Inc. (RHAT)
and FreeMarkets Inc. (FMKT).
The stocks have risen 1,535 and 400 percent from their respective $14
and $48 offering prices. Red Hat has 68.8 million shares outstanding,
but only 6 million, or 8.7 percent are floating. FreeMarkets has 34
million shares outstanding, but only 3.6 million shares, or 10.6 percent
are floating. Such small floats have guaranteed Internet stocks huge
upswings as demand for shares in Net companies easily out-strips
supply. Small floats also give a lot of power to the hyperactive day
traders and often spell headaches for short-sellers who can easily be
“squeezed” with so few shares on the table.

But float is only part of the story. The real issue is the
unprecedented growth of the Internet industry and its companies.
Actions speak louder than words, and numbers are a result of actions, so
we’ll let them do the talking. The following is a listing of third
quarter results from leading Internet companies. With fourth quarter
numbers just around the corner, the following results should establish a
baseline for investor expectations. (PCLN)
reported Q3:99 revenues of $152 million versus $9.2 million in revenues
for Q3:98, signifying revenue growth of more than 1,500%. Inc. (AMZN)
reported Q3:99 revenues of $356 million, up 131% from last year’s $154
million third quarter revenue. AMZN reported 4Q sales of $650 million —
more than in all of 1998.

Ariba (ARBA)
reported a significant surge in sales during its fourth quarter. Sales
grew 266% to $17.1 million. Ariba generated $45.4 million in revenue
for the year, up 443% from last year. (INTM)(the
publisher of this site) reported Q3:99 revenues of $4.1 million
versus $973,000 in revenues for Q3:98, an increase of 323%. Revenues for

the nine months ended September 30, 1999 were $8.6 million as compared
to nine-month revenues for 1998 of $2.8 million, an increase of 210%. (HOMS)
reported Q3:99 revenues of $18.6 million versus $4.9 million in revenues
for Q3:98, a revenue surge of 280%.

reported that revenues rose 287% in Q3:99. Revenues climbed to $7
million from $1.8 million in last year’s third quarter. MarketWatch
posted a pro forma net loss of $0.50 per share. First Call estimates
called for a loss of $0.64 per share.

BackWeb Technologies (BWEB)
announced revenues for Q3:99 increased 156% to $6.2 million, from $2.4
million in Q3:98.

BroadVision (BVSN)
reported Q3:99 revenues of $29.8 million, up 122% over Q3:98 revenues of
$13.4 million.

[email protected] (ATHM)
reported revenues of $113 million for Q3:99 compared to revenues of $58
million in Q3:98, an increase of 95%. Cable modem subscribers at the
end of Q3:99 totaled 840,000, up 35% over Q2:99, and up almost 400% when
compared to Q3:98.

This unprecedented growth is what separates “Net stocks” from “the rest”
stocks. What other industry can claim this kind of explosive revenue
growth? That being said, [email protected] encourages investors to 1)
acknowledge that Internet mania may very well be a bubble, 2) understand
the contributing factors/metrics, but 3) realize that the Internet stock
“bubble” is different than all bubbles ever experienced or seen in the
past. In the early 1990s we experienced the biotechnology craze, where
biotech stocks sailed to incredibly high prices and valuations. The
companies behind these stocks were going to change the face of the
medicine and agricultural industries. A very ambitious, worthy and
profitable goal, but if successful, these companies would only be
reshaping and transforming two industries.

The Internet is different because it stands to affect every person,
business, and industry across the globe. [email protected] simply doesn’t
believe concerns over the lofty valuations alone will bring Internet
stocks back down to earth. Investors should instead be on the lookout
for: 1) changes in the supply vs. demand equation. The flooding of IPOs
to market, and companies increasingly double dipping for funds
(secondary offerings), will dramatically increase the amount of Internet
stocks and shares in individual companies available to Internet stock
investors, 2) a slowdown in the growth drivers. Any slowdown in the
percentage growths of traffic online, total advertising dollars spent
and total e-commerce dollars spent, could adversely affect stocks
momentum and 3) “earnings” growth. Any flattening of growth or missed
estimates could spell disaster for a stock, its sector, and/or the
industry as a whole.

Amgen (AMGN)
has been one of the leading biotechnology companies. After the biotech
bubble burst, Amgen’s stock price dropped 50% off its high in just one
month. Yet today Amgen trades at more than three times the price of its
“bubble” high. Many weaker companies in the industry have since
disappeared. Amgen is proof that holding the highest quality stocks in
an Industry at any point in time can be a rewarding proposition.

Net Value for Investors means picking sector leaders that will continue
building mind-share and market-share, as well as growing their earnings
quarter over quarter and year over year.

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