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January 29, 1999 One fundamental metric that has become popular in recent years is "PEG" - the price/earnings to earnings growth rate ratio. The PE ratio is the basic value metric of any company, but a company that is growing should carry a higher PE than one that is stable or shrinking, because one can anticipate higher earnings in the future. As a metric for evaluating growth stocks, PEG simply takes a ratio of PE to earnings growth rate, and the lower the number, the better the value. Now if you try to apply this to the high flying Internet stocks, you run into a problem: no earnings. These companies are trying to grow rapidly and gain significant market share, so that in the future they will be profitable. They are spending every dollar they can on growth - advertising, PR, discount prices, more capacity - to obtain market leadership. The maxim is that the leading company in any market makes money, the number two company holds its own, and the rest are losers. So if you believe the Internet is a huge new market, you'll want to own the market leaders. Instead of using earnings and earnings growth, we can do something similar with sales (revenues) and sales growth. We can compute the price/sales ratio (PS) and compare it to the rate of revenue growth. I call the resulting ratio "PSG" - price/sales to growth. I'm working with per share numbers because this takes into account dilution from stock sales. For the sales growth rate, I compare the most recent quarterly sales with the year ago numbers. For sales, I take the most recent quarterly earnings, project them up using the growth rate to an estimate for today, and multiply by four. I do this so that the elapsed time since the last quarterly report doesn't distort the calculations, and this is important when some of these companies are growing at 100% a year or more. Here are the results: Symbol Name Business P S S-1 RevGr PrjRev PS PSG LCOS Lycos Ad sales $137 $0.59 $0.31 90% $0.72 47 0.53 SEEK InfoSeek Ad sales $78 $0.65 $0.46 41% $0.67 29 0.70 YHOO Yahoo! Ad sales $354 $0.65 $0.30 117% $0.71 125 1.07 AMZN Amazon.com Ecommerce $117 $1.64 $0.47 249% $1.96 15 0.06 EGRP E*Trade Ecommerce $110 $1.55 $0.90 72% $1.64 17 0.23 EBAY Ebay Ecommerce $278 $0.45 $0.09 400% $0.59 117 0.29 TMCS TktmstrOnl Ecommerce $63 $0.21 $0.10 110% $0.23 69 0.63 CNCX Concentric ISP $44 $1.64 $0.97 69% $1.73 6 0.09 MSPG MindSpring ISP $102 $1.42 $0.72 97% $1.53 17 0.17 ATHM @Home ISP $125 $0.16 $0.03 433% $0.22 145 0.34 AOL Am Online ISP $176 $1.71 $1.15 49% $1.78 25 0.51 CYCH CyberCash Support $16 $0.25 $0.18 39% $0.26 16 0.40 BCST B'cast.com Support $167 $0.27 $0.14 93% $0.29 144 1.55 P is today's closing price, S is the most recent quarterly sales per share, S-1 is the same for a year earlier, RevGr is revenue growth rate, PrjRev is projected revenue to today, PS is price/sales and PSG is the price/sales to growth ratio (lower is better). I've listed companies that are fairly pure Internet plays. I've grouped them by business, although the categories are pretty wide in this market. A company that engages in e-commerce, like Amazon, should not be compared to a portal site like Yahoo! because Amazon is selling physical goods while Yahoo! is selling a purely online product, banner ads (for the most part). The "support" category is especially wide - I mean by this companies that help other web site companies. It's something of a "none of the above" category. I have left off conventional software and hardware companies, and companies that develop web sites for others. I have also left off companies that don't have 12 months of financial reports. And finally I have left off companies that are not growing at least 35% per year (fatally slow in this group). So my picks today would be Lycos, Amazon.com and Concentric. I'm not making a pick from the support group because CyberCash is growing too slowly and Broadcast.com is too pricy. Whether one should buy today or wait for a reaction is a decision I leave to you. Today's close: Dow 9358, S&P500 1279, NASDAQ 2505 January 18: Dow 9340, S&P500 1243, NASDAQ 2348 January high: Dow 9643, S&P500 1279, NASDAQ 2505 September low: Dow 7539, S&P500 956, NASDAQ 1419 The S&P and NASDAQ made record highs today - the market is really cooking along, led by the tech stocks. Microsoft announced an investment in NTL, Inc. (NTLI) earlier this week. NTL is a British cable company. NTLI jumped 12 points on the news - so perhaps the idea of investing along with Microsoft is getting too well known. Even so, NTLI has gone up a few more points since then.
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