When it comes to Internet stocks many investors come into the arena without enough clues to unearth the value or lack of it, to separate hype from hope, execution from executioner.
In the spirit of providing a basis for approaching Internet stocks, I generated this handy table that, while no means comprehensive, offers the seven things I believe must be considered when looking at an Internet stock. Here’s some of my elementary elements, essentials:
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Steve Harmon’s 7 Essential Elements |
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| market potential | look for huge markets, example: postage (stamps.com (NASDAQ:STMP) which globally is a multi-hundred billion dollar market |
| management | has this group had success in the past or are they a complementary team, do they have the vision, strategy, execution, mix of talent to realize the market potential — and appropriate incentive for all? example: Yahoo! (NASDAQ:YHOO) |
| growth | is growth in users, page views, reach, sales, alliances, partners, employees, earnings (or narrowed losses), moving at a viral pace both internally and externally (acquisitions) quarter-on-quarter and year over year? example: eBay (NASDAQ:EBAY), Lycos (NASDAQ:LCOS) |
| category leadership | is this firm the pioneer setting the tone for the entire sector, does it have a substantial mindshare lead or market lead vs. rivals? can it dictate the category moves? example: AOL (NYSE:AOL) |
| valuation | what is the stock trading at on a revenue multiple basis vs. peers? what is the overall market capitalization vs. peers and offline rivals (if any)? what are the valuation per user/customer/page view and revenue per user/customer/page view? what are earnings or potential earnings and when? what is valuation relative to other Internet stocks, offline stocks and to market potential? example: Amazon (NASDAQ:AMZN) vs. barnesandnoble.com (NASDAQ:BNBN) vs. Wal-Mart (NYSE:WMT) vs. Web etail sales vs. offline retail sales? |
| flexibility | can this firm switch gears and chart new courses if the market they’re in changes course or dries up? example: Microsoft (NASDAQ:MSFT) embracing the Internet corporate wide or Egghead.com (NASDAQ:EGGS) shutting its brick and mortar stores to be 100% Web-based; the search engines-turned media companies, portals. |
| barriers to entry | does the firm have any sustainable advantage in one of several key areas: technology; first to market advantage; better user experience, substantial partnerships; key expertise; installed base of user/clients/customers; brand awareness; cash on hand; capitalization (attractive stock as weapon for buyouts, etc); superior management; exclusive contracts with key partners. Example? Broadcom (NASDAQ:BRCM), RealNetworks (NASDAQ:RNWK) |
Please feel free to copy this table for future reference, with attribution in place.
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